Wednesday, October 5, 2011

Jim Rogers on the great advantage & disaster of commodity investing - Commodity Online

Last Updated : 04 October 2011 at 11:25 IST

"Investors make the same mistakes investing in anything. They use too much leverage. The great advantage of commodity investing is you can use enormous leverage. The great disaster of commodity investing is you can use enormous leverage. Everybody in the world has a story about a brother-in-law who went broke investing in soybeans. But you don’t have to invest that way."

Giving investors these nuggets; among other things, Jim Rogers speaks about his Rogers International Commodity Index. Hard Assets Investor continues its ongoing series examining how the major commodity indexes work by interviewing the people and discussing the strategies behind them. In this installment, Managing Editor Drew Voros caught up with legendary investor Jim Rogers, who created the Roger International Commodity Index in 1998.

Hard Assets Investor: Why did you create the Rogers International Commodity Index?

Jim Rogers: At the end of 1998, I thought the bear market in commodities was coming to an end. I wanted to invest in commodities. So I decided what I’d do is just invest in a commodity index. But then when I went and looked at commodity indexes, they were all so horrible that I couldn’t bring myself to put my money into them.

HAI: When you say “horrible,” what do you mean?

Rogers: For instance, at the time, the Goldman Sachs [Goldman Sachs Commodity Index] was about two-thirds energy. I said, “Gosh, what kind of index is that?’ You might as well invest in oil. More important, they change the index every year. You have no idea what you’re going to own if you invest in the Goldman Sachs index. In my book, “Hot Commodities,” I have a study which shows the dramatic changes in the Goldman Sachs index.

For instance, one year something’s 26 percent and a few years later it’s 4 percent. I said to them, “How can anybody invest in that? If I invest in the Goldman Sachs index, I have no idea what I’m going to own in three or four years. And you don’t either.” This is my money I’m talking about, I’m not talking about clients’ money. And as you know, Goldman Sachs used to have extensive arbitrages against its own customers. I didn’t have any customers. And I wasn’t interested in arbitraging against customers; I was interested in investing my own money. So I eliminated that one.

I then went to Dow Jones. I happened to go to college with a guy, Paul Segal, who was running The Wall Street Journal at the time. I said, “Paul, I want to license your commodities index.” And he said, “We don’t have a commodities index, Jim.” So I pulled out The Journal and showed him the Dow Jones Commodities Index. They later got in bed with AIG and updated their index. Then a few years ago sold it over to UBS. The index changes all the time. There are things in there like aluminum, which is weighted more important than wheat. Some people in the world had never seen, much less used, aluminum. Everybody uses wheat.

Then there’s the RJ/CRB Commodity Index that has changed 10 times in its history. At the time I was looking, they had Orange Juice and Crude Oil as the same weighting. In most people’s lives, crude oil is a whole lot more important than orange juice. I wouldn’t put my money into any of them. I had to come up with my own index, which has beaten the socks off all of the others.

Equally important, mine has been stable and consistent. The changes have been de minimis in the Rogers Index since it started in 1998. Those others change all the time. I don’t know how anybody could have conceivably invested in them. That’s not even gambling. At least with gambling you know how many cards are in the deck. But with these other indexes, it’s not even random. It’s totally unknown what you’re investing in. That may be one reason that I’m beating the socks off the others.

HAI: You do change the index under extraordinary circumstances according to your filings. When was the last time it was actually rebalanced and why?

Rogers: There have been small things. Something may go from 20 basis points to 10 basis points or something like that. It’s mainly because of liquidity. We might have a slight change in one of the agricultural components, but we take it away from one component and add it to another agricultural component, which is comparable.

I noticed in one of your previous stories that other index guys were trying to take a swipe at my index, by saying everything in their index was a significant percentage. I would remind that person that the S&P 50 has 20 components which have 1 basis point, one one-hundredth of a percent. So if he thinks that small components should be dropped, he’s fighting the world. As far as I know, the S&P 500 is the most extensively known and used index in the world.

I wanted my index to be international. I wanted it to reflect the cost of doing business around the world. I wanted it to be broad based. None of the other indexes has rice, for instance, even though two-thirds of the people in the world eat Rice every day.

The other problem I found with the others is that they’re U.S. centric. At the time I was looking for an index, most of them wanted to reflect what was going on in the time zones where they were working. They had U.S. and U.K. components, so that it’s easier to arbitrage against their customers, or just to compile the index. This was long before computers were so extensive. Now, of course, that doesn’t really matter very much.

And of course you have to consider liquidity. It doesn’t do you any good to have an index which is just academic. You’ve got to be able to use it.

HAI: Why is human intervention to you more important than a rules-based index?

Rogers: The Dow Jones industrial average or even the S&P 500 are “human intervention, human judgment,” if you will. In my view, if you want to have stability and consistency in transparency, I’d prefer a system which we have developed. It stood the test of time.

The consumption of Cotton doesn’t change that much over any long period of time. Maybe there are ups and downs. But you don’t change the weightings because cotton goes up one year or down another year. Look at the Goldman Sachs Index. If something goes up in price, the index increases the weighting. That’s the way my mother invests.

My mother calls me up and says, “I want you to buy X,” and I say, “Why?” And she says, “Because it’s tripled.” I say, “Mother, you’re supposed to buy it before it triples.” Goldman Sachs and UBS and the rest of them raise the weighting when prices rise. Listen, I’m an investor. This is my money. I know what people need if they’re going to invest. And they don’t need some gimmick to attract investors. They need something where they’re going to make money.


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