Monday, December 27, 2010


The Pragmatic Capitalist ( is one of my favorite blogs - even if we don't always agree. Mr. Roche has posted an excellent piece on Commodities which pretty much represents my thinking on the topic (perhaps ex-oil). I encourage you to read the entire piece, it is well worth it and provides an entirely different perspective than Glenn Beck's advertisers.

A few of my favorite portions:

Benjamin Graham Quote:

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” - Benjamin Graham

Seth Klarman Quote:

“Buying anything that is a collectible, has no cash flow, and is based only on a future sale to a greater fool, if you will—even if that purchaser is not a fool—is speculating. The “investment” might work—owing to a limited supply of Monets, for example—but a commodity doesn’t have the same characteristics as a security, characteristics that allow for analysis. Other than a recent sale or appreciation due to inflation, analyzing the current or future worth of a commodity is nearly impossible.
The line I draw in the sand is that if an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation. The hardest commodity-like asset to categorize is land, an asset that is valuable to a future buyer because it will deliver cash flow, not because it will be sold to a future speculator.”

From Roche and Klarman:

There’s an interesting counterargument that can be made for a commodity such as gold, however. Doesn’t its currency like characteristics make it unique? Seth Klarman says no:

“Gold is unique because it has the age-old aspect of being viewed as a store of value. Nevertheless, it’s still a commodity and has no tangible value, and so I would say that gold is a speculation. But because of my fear about the potential debasing of paper money and about paper money not being a store of value, I want some exposure to gold.”

Hope you enjoy - you will also find the comment section provides even more learning opportunities.

Scott Dauenhauer CFP, MSFP, AIF