Are commodities the next “bubble”?
The general public always seeks to find a way to make a quick buck.
A lot of these people don't have the background–some might say
intelligence–to make sound investments, but invest anyways. They've got
some money to invest, or worse, borrow money, and it
has to go somewhere. A little blind success is often interpreted to
equal knowledge or talent. In the past decade, it's been tech stocks, then
real estate, and now commodities.
At the height of the tech bubble, you could throw a dart out the
window and hit a winner. I heard people brag about making a
killing on this or that stock. I know a guy who gave a kid some money because he had read a lot of
books and had made some money for others. He turned a little profit on
the first investment and, obviously, this kid–and I really mean a
kid–knows something and has a knack for this. The guy went all in on
the next round and ended up losing almost all of it. The wife of a
friend bragged about how easy it was to make a killing on tech stocks
and that I should really get into it.
A couple years ago, another fellow I know was bragging about his
real estate investment in Las Vegas. How the value had risen so much in
the short time he had owned it. He was looking to make another purchase
in Phoenix. I was floored because even at this time the Phoenix and Las
Vegas markets were showing warning signs. I questioned him and he
hadn't even been doing any research!
You know what the sign of the good investor is? Knowing when to get out. You have to be willing to give up some potential upside for cashing in on actual gains. What most people don't understand is that the real trick to investing is NOT knowing when to get in, but when to get out. How many investor friends do you know that have an exit strategy?
Well, commodities have all the makings of the next bubble. In
particular, I'm talking about oil, because that's the most visible to the common man. My
feeling is that for a bubble to be created, you need mass amounts of
investors. So that means you've got to go past the normal institutional
investors and hit the everyday Joes. For that to happen, the investment
has to be understandable to them. It's gotta have a direct impact on
their lives. Tech, real estate, and gasoline all meet this test. It's
gotta sound logical to them on a very basic level. You aren't going to see a bubble in esoteric areas like pharmaceuticals, rail roads,
shipping, etc. because the everyday Joe can't see the direct impact on
their life and, more importantly, a big quick payoff potential.
It's kind of like a pyramid scheme. For it to work, you need a lot of suckers…err…I mean people. The smart people, the original organizers, are at the top. These are the institutional investors. These people do it for a living and know what they are doing. As the pyramid grows you need more and more base people and that means you have to go beyond the real investors. Eventually you run out of people (or money) and the whole thing collapses, or in our case bursts.
I suppose the litmus test is when you see people that don't normally invest start investing. I haven't heard anyone around the office claiming to be making boat loads of money buying oil, corn, etc., so perhaps this bubble has a ways to go. In the meantime, all of us will have to pay the price at the pump.
On a side note, I think the high price of gas is a good thing. It's
the only way we are going to see alternative fuel development. Also, if the
price gets much higher, driving is going to become a luxury and that
has got to impact traffic (if it hasn't already).