In one sentence: Buy low and sell high means below and above value, not simply cheaper then dearer. Commodities track inflation only loosely, you can own them four ways (physical, ETF, futures, producer stocks), and futures and thin-market funds are places for speculators.
Key ideas
- Buy low, sell high, properly defined. Most advisors agree with the slogan but mean "buy today for less than the future price". Phil means buying for less than the value and selling above it. Modern portfolio theory says that mispricing doesn't exist. [00:00–05:30]
- Why sellers sell cheap. Fear. Most traders have a horizon of three to six months. Buffett, Munger and Pabrai look years out. Commodity prices also move on rumour and speculation (weather, world events). [05:30–08:00]
- Commodities vs inflation. Gold was about $800 in 1980. With roughly doubled prices it would be about $1,600 now, but it's about $1,000, after a peak near $1,800. Oil was $40 in 1980 and $35 now, after a spike to $150. Supply and demand, not inflation, drive each. [08:00–12:30]
- Oil as a supply story. US fracking added about 4 million barrels a day, Saudi Arabia raised output to hold market share, and Iran may add more. That is a large supply increase on a roughly 40 million barrel market. [12:30–15:00]
- Jim Rogers' bull case. In Hot Commodities he argues China and India joining the middle class will strain supply. Phil says he isn't sure who is right. [15:00–17:00]
- Agriculture as a hedge. The S&P GSCI grain index went from about 150 (1980) to 900 (2008) to about 312, so it roughly kept up with inflation over 30 years but with a wild ride. Corn was about $2.50 in 1948 and about $2.48 in 2005, because supply growth matched demand. [17:00–20:00]
- Four ways to own one. (1) Take physical delivery; (2) an ETF that holds the commodity (GLD for gold) or a basket (GSCI, Rogers index); (3) shares of producers; (4) futures. People who say they buy commodities usually mean futures. [20:00–30:30]
- ETF liquidity warning. Bond ETFs chased yield into thinly traded junk bonds, paid up on the way in and may struggle to sell on the way out. Large flows into a commodity ETF can create the same problem. [25:00–29:00]
- Counterparty risk. Phil cites claims of about 200 paper ounces of gold per real ounce. He compares the chain of derivatives on mortgages in 2008. He says he doesn't know whether the same applies to other commodities. [30:00–34:00]
- Speculator, not investor. Futures are highly leveraged (a dollar controlling $200). The real use is a producer hedging, such as a wheat grower. [33:30–35:30]
- Commodity stocks. The only moat a producer can have is being the low-cost producer. Details are promised for next time, along with robo-advisors. [36:00–38:30]
How it maps to RuleOne
- Producer stocks are the only route in the RuleOne stack. Cost position shows up in margins and ROIC across a cycle, which the screen's multi-year history can show.
- The advice to check liquidity before you buy a fund applies to any ETF, but the stack does not hold ETFs.
Buffett, Munger and Graham links
- Buy below value: Graham's margin of safety (The Intelligent Investor, ch. 20) and the "$10 bill for $5" framing in 000.
- Buffett on commodity businesses: see his 2007 letter on low-cost producers; check it before quoting.
- Pabrai appears here as a long-horizon investor. Phil says "Manesh Pibris" in the transcript, which is Mohnish Pabrai.
Words to know
- ETF (exchange-traded fund): a fund that trades like a stock and tracks an index or asset.
- GSCI: the S&P Goldman Sachs Commodity Index.
- Counterparty risk: the risk the other side of a contract can't pay.
- Low-cost producer: the company that can still profit when prices fall.
Try this
Open All stocks, filter to one commodity industry and sort by ROIC or margin history. Which names stayed profitable through the 2015 crash? Write down which one you'd call the low-cost producer, and why.
Check yourself
- What does "buy low" mean in Rule #1?
Answer
Buy for less than the business is worth, not just for less than a future price. - What are the four ways to own a commodity?
Answer
Physical delivery, an ETF or fund, producer shares and futures contracts. - What is the only moat a commodity producer can have?
Answer
Being the low-cost producer.
Short quotes
"This is a great place to be a speculator and a gambler, but it's not a great place to be an investor." (Phil, ~34:00, auto-transcribed)