Investing for the Long Term
| by Daniel R., Homemade Investors Friday, September 12th, 2008 Is the Commodities Bull Market Over? It's been a wild ride for commodity traders this month. Gold, silver, and oil plunged, giving bulls an opportunity to get in at lower prices, while at the same time causing the masses to head for the hills, screaming that the great commodities bull market is over. Again. In fact, I remember something similar happening last August around this time. It turns out that big sell-offs in commodities are not uncommon, especially in August. This particular sell-off was predicted by several of the analysts I follow, although everyone seems to have underestimated its severity. Big selling events are normal and healthy during any secular (long-term) bull market. During the last big bull market in stocks (1980-2000), panic selling occurred from time to time. Yet when you look at the long-term chart, these events are eclipsed by the larger uptrend. Take a look at the following chart of the S&P 500: |
When would you have sold during the above bull market? Some of these sell-offs were terrifying to investors at the time (like the 30% drop in 1987!), yet the long-term chart shows that investors who sold on these dips probably made a mistake. In secular bull markets, a good long-term strategy is to buy on the wipe-outs and hang on for the ride! It should be noted that gold suffered a vicious secular bear market during this same 1980 to 2000 period. Clearly stocks were the right investment at the time. Now take a look at the chart of gold in the 1970s. This was the last great secular bull market in commodities, during which gold, silver, and oil made people rich. On the other hand, the stock market spent the decade in a bear market. Notice how gold lost half of its value between 1974 and 1975. How many investors do you think were shaken out during that correction? In hindsight, they probably should have held through the difficult times and accumulated on the dips. Clearly gold was the place to be in the 1970s. I'd like you to take a few important points away from our discussion so far: (1) Stocks and commodities run in 15 to 20 year alternating cycles. When one is in a secular bull market, the other is in a secular bear market. This cycle has been occurring for over a hundred years. (2) A buy-and-hold strategy only works when what you're buying is in a secular bull market! Unless you want to see your portfolio to head in the wrong direction (i.e. down) for a decade or two, you might want to watch where you're investing your long-term investment money. (3) The best way for long-term investors to participate in a secular bull market is to buy the wipe-outs and hold through the rough patches. In every secular bull market, there are times when nearly everyone is saying that the bull market is over. These generally coincide with sharp market pullbacks. Anticipate this beforehand, and decide whether you'll be a buyer or a seller during these panics. It's my opinion that we're in a secular bull market in commodities (gold, silver, oil, food, base metals, energy, etc) and a secular bear market in U.S. stocks. This is the reason I've been buying commodities and shorting the stock market. When the commodity bull market is over several years from now, a secular bull market in stocks will likely begin. At that time, I'll sell my gold and silver and buy stocks. But that turning point is probably several years away. Until then, I'll continue accumulating on the big dips. If you want to learn more about secular bull and bear markets in stocks and commodities, I'd suggest reading the following two articles by Brent Harmes: http://www.homemadeinvestors.com/08-05-14.html http://goldsilver.com/news_june_13_2006.php One final comment: In this article, I've only spoken concerning long-term investing. Short-term traders are able to make money both in secular bull and bear markets. Also, it's not uncommon to have a cyclical (small) bear market in the middle of a secular (big) bull market. This is what happened to gold during 1975 and 1976 (see the above chart). This didn't end the bull market in commodities, but it would have shaken out the great majority of long-term investors. This was also the last good buying opportunity in gold before it took of to the upside. Also, it is possible that we are entering such a bearish phase in the current commodities bull market! Whether or not we experience a small bear market in commodities, it's worth thinking about how you'd handle one. I'd likely add to my positions and do a bit of trading. I might also find a hobby to keep my keep my mind off of things. Sitting tight through a short bear market is more easily done if you haven't invested money that you need for other things. As always, use your common sense. **************************************** To sign up for our FREE EMAIL NEWSLETTER, visit our main page at http://www.HomemadeInvestors.com. Disclaimer: Homemade Investors is published by Homemade Investors LLC. The information contained in this article does not constitute personal investment advice and is not designed to meet the personal financial needs of any individual. Investors should seek advice from a qualified investment advisor before entering into any transaction. The information contained in this article is deemed reliable but is not guaranteed. The information and opinions contained in this article are subject to change without notice, and there is no obligation to update such. To republish this article, visit http://www.HomemadeInvestors.com/reprint for guidelines. © 2008 Homemade Investors LLC. All rights reserved. |
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| The above chart is provided courtesy of Zeal, LLC. The chart may be found in its original context here: http://www.zealllc.com/2004/au3stage.htm. |