Lesson from House of Rothschild

"--- the legendary House of Rothschild who, --- attributed his success to two things. He said he always bought when there was blood in the streets-panic, chaos-when despondency gripped the markets. (In old man Rothschild's case, investing amid the turbulence of the Napoleonic wars, the blood was just as likely to be literal as it was to be figurative.) And he always sold "too soon." He did not wait for enthusiasm to peak. He always knew when to get out, and he got out in time with all his money.

"I doubt Meyer would be buying U.S. stocks these days, since he always waited for serious despair. After all, many on Wall Street are still raking in big money, employment there is down only slightly, stocks are not cheap by historical measures, and mutual funds are still thriving. He would probably point out that Japanese mutual funds have lost 95 percent of their assets since 1990; that is more like real blood in the streets.

“I suspect that old Meyer, if he were around today, would have moved his investments to commodities, after having gotten out of stocks earlier. There have been long periods when stocks did well while raw materials did horribly – the 1980s and 1990s, say. The late 1960s and the 1970s saw the reverse. From 1906 to the early 1920s stocks did nothing while commodities boomed. It may sound radical, but it has occurred repeatedly. There cycles always have occurred as supply and demand patterns have shifted. Everyone invested in stocks in the 1980s and 1990s, but little money went into productive capacity for natural resources. There was a glut after the great boom of the 1970s, so no one was calling us to invest in sugar plantations or lead mines or offshore drilling rigs. Demand has continued growing worldwide, eventually to exceed supply, which has been flat for years. Asia alone has become a huge buyer; china is now already one of the world’s largest importers. Excess inventories built up in the Cold War have been liquidated. We now have a classic change. Raw materials supply and demand are out of whack again, and inventories are down. Commodities will do well for years, while stocks, recovering from the bubble, will do little.

“The new commodity bull market has started, but few realize it yet, just as few recognized that a new bull market in stocks has started in the 1980s. Commodities rose more that 80 percent between the end of 1998, when Paige and I left, and the beginning of 2003, while shares were down substantially. The government, Wall Street, and the media keep telling us that prices are not rising, but one can go over to the commodity pages to check reality. War and the printing of money just ensure that the commodity boom will last even longer.

“But it will not last forever. Someday, in several years, we will have to sell our commodities and go back to stocks. Merrill Lynch no longer has commodity brokers because it is such a bad business. When Merrill Lynch goes back into the commodity business and CNBC starts broadcasting from the soybean pits in Chicago, sell out and buy stocks.”

--- P. 336-P338, "Adventure Capitalist" , Jim Roger