Commodity Investing... On Autopilot

Today’s letter is about the RICI... 

The RICI is the result of one man’s quest to create the perfect commodity investment. You can take your position now if you like, but let me tell you the story of how it came to be...

In 1968, Jim Rogers didn’t know anything about finance. He says inexperience was his advantage. While other analysts were stuck on stocks after a two-decade bull market, Rogers had no bias. He was only concerned with buying cheap assets. This concern led him to the “forgotten” commodity market.

Between 1971 – the year he bought his first CRB Commodity Yearbook - and 1980 - the year he retired - Rogers made a fortune from the huge rise in things like cotton, silver, and oil.

It wasn’t luck. It was a bull market... and Rogers had the conviction to ride it.

Now, Rogers is a best-selling author and one of the most famous speculators of all time. Personally, I love his books. All three became bestsellers. His first one, Investment Biker was the first investment book I ever read. It’s extraordinary. I recommend it to everyone.

But I digress. Let’s get back to the RICI...

In 1998, investors were crazy about Internet stocks. That year, says Rogers, more than one-third of the covers of Business Week – and five 100-page special supplements – were about “The Internet Revolution.” Stocks were everywhere on TV. They were the main topic of conversation at dinner parties, and ridiculous books with titles like The Dow 100,000 littered bookshelves.

Meanwhile, Rogers was getting into commodities again. He contributed articles to Barron’s and The Wall Street Journal explaining how “the fast-growing Chinese economy would drive the demand for raw materials.” He told reporters that stocks were the wrong place to be... and a new bull market in commodities was in the cards.

Most people ignored him. Those that listened said he was crazy. But Rogers saw tremendous value in raw materials. As he explains:

“I went back to my CRB Commodities Yearbooks and other sources to see what the deal was with the markets in agricultural products, energy, grains, metal livestock, and life’s other valuable things. They were incredibly undervalued... In fact, once you factored in inflation, commodity prices were approaching lows not seen since the depression.”

Merrill Lynch gave Rogers the final buy signal. In the 1970s, Merrill Lynch made huge profits from trading commodities, but in 1998, they announced they were leaving the commodity business... there wasn’t enough interest.

“I couldn’t stop smiling,” Rogers says.

There was one obstacle, however. Rogers had been retired from professional trading for nearly 20 years. He didn’t want to rejoin the fray. Besides, he was planning his second around-the-world road trip, set to begin on the first day of 1999.

A commodity index fund was the obvious place for his money. His investment would be on autopilot, tracking the average price of a basket of commodities. There would be no big management commissions, no hassles, and, best of all, Rogers wouldn’t have to trust his fortune with the decisions of some fund manager.

There were four commodity indexes to choose from. Rogers looked into all of them. None of them were suitable. They were all unfairly weighted and out-of-date for his taste.

Rogers realized he would have to base the fund on an index of his own creation... and the Rogers International Commodities Index (RICI) was born.

The RICI is a price average of 35 commodities... from rice, to gold, to canola oil, to crude oil. Every year, Rogers reviews the basket’s weighting to make sure it reflects the price action of raw materials around the world.

It’s a perfect measure of the commodity market. Now... we just need a way to invest in it...

Since its inception in August 1998, the RICI is up 253%. But you can’t invest in the index. You have to buy an instrument that tracks the index.

The Rogers Raw Material Fund was set up for this exact reason. Unfortunately, the fund was involved with the Refco debacle, and there’re all sort of legal issues to clear up. Allegedly, when Refco collapsed last year, it took down 85% of the fund’s capital. Rogers is now suing Refco for $362 million.

There’s another way to make this investment. Not many people know about these instruments... although I expect they’ll become a very popular product in the next few years. They’re called TRAKRS (Total Return Asset Contracts). Basically, TRAKRS are futures contracts, with expiry occuring every three years, set up to trade like a regular stock. Merrill Lynch created them.

TRAKRS trade just like ETFs – they are cheap, flexible and you can buy and sell them in your brokerage accounts. At the moment, there are five TRAKRS in the market. One of them is the Rogers International Commodity TRAKRS.

Thing is, because they are so new (the RICI TRAKRS was launched in November 2005) not many brokers sell them yet.

Today’s DailyWealth is simply to alert you on the existence of this vehicle... there’s plenty more information to cover.

You can find out more with Merrill’s brochure for the RICI TRAKRS here:

And here’s a link to a Business Week article that explains TRAKRS in more detail...

I encourage you to check this story out further... as the RICI TRAKRS is the perfect vehicle to follow Jim Rogers’s autopilot commodity strategy.

Good Investing,

Tom