True “investments of the decade” are uncannily hard to spot. When the clock struck midnight on December 31, 1999, technology was all the rage — and Cisco was well on its way to becoming the world’s first trillion-dollar company. Barely a decade later, Cisco trades at less than 1/10th that level. Today, gold and silver are grabbing the headlines — and for reasons that seemed just as compelling as when Cisco stock was $80 — not the $16.60 it closed at yesterday.
So, if you want to spot “investments of the decade,” you have to look far beyond the headlines.
Instead, look for one of these two characteristics:
First, “investments of the decade” are uniformly ignored. History tells us that when talk show hosts are flogging gold on television, the big gains have long been made.
Second, they are hated. Such was the case with commodities at the height of the tech boom, when Merrill Lynch shut down its commodity trading desk, just as commodity prices bottomed. Contrast that with gold and silver today, which have scarcely ever been more popular among investors.
So, with those two caveats, below are my two top “investments of the decade.”
Here’s a word of warning. Both of these investments will seem as nuts to you as say, selling your Cisco in January 2000, and putting your money into “low-tech” gold — which then soared five-fold during the next 11 years.
Commodities guru Jim Rogers has been an agriculture bull since he launched the Rogers International Commodity Index in 1998, just before the peak of the dotcom boom.
Although Rogers is bullish on a wide array of soft commodities, he is most bullish on rice — a grain that even the most fervid of agricultural bulls is likely to ignore.
On the supply side, rice has never been less popular. Farmers are reducing acreage for rice by as much as 30%. The reason is simple. Farmers are frustrated with rice prices, which have lagged behind other agricultural commodities. Cotton and soybeans simply make them more money.
Taking a longer-term perspective, the investment case for buying rice is clear as day for Rogers. With corn, soybeans, cotton and rice competing for the same land, it’s obvious to Rogers that savvy investors should bet on rice. By planting only the crops that have already rallied, farmers inevitably create a shortage in the laggard grain. Sure as night follows day, rice prices must eventually rally.
Cotton went through the same cycle recently. Soybeans and corn were farmers’ favorites for years, while cotton’s price stayed in the dumps. So the supply of cotton fell and, eventually, the price of cotton skyrocketed.
Rice exporters are already projecting lower crop yields for 2011. Thailand, the world’s biggest exporter of rough rice, predicts its main harvest will be off 5.3% this year due to devastating floods — the worst flooding in five decades. The U.S. Department of Agriculture reports that Egypt’s harvest is down 30% from last year.
Sure enough, the price of rice has begun to rebound, as global demand has surpassed production for the first time in four years. The Chinese government has begun to release rice reserves in an attempt to reduce prices. Some analysts are predicting rice will touch $1,000 per metric ton. That’s up from $554 in February and from $474 just last June. And it could go a lot higher than that…
Sadly, investing in rice for you isn’t easy, as there’s no pure exchange-traded fund (ETF) play on rice. And rice makes up just over 2% of the ELEMENTS Rogers International Commodity Agri ETN (RJA). Thus, you’re limited to trading rice futures — not impossible, but a more complex game than buying a stock or an ETF.
In fact, by the time a rice ETF arrives, you should take it as a signal that most of the money has been already made.
II. Japanese Small Caps Stocks
Japanese small caps have the advantage of being ignored and hated.
That’s a big switch. Two decades ago, Japan attracted the frenzied admiration of the world. Tokyo was one of the world’s great trading centers alongside Wall Street. Back then, not owning Japanese stocks was a career-threatening move.
Today, the opposite is the case. A recent Merrill Lynch survey found that 29% of fund managers across the globe were underweight Japan. There is now an entire generation of professional investors who have learned to avoid Japan.
And can you blame them? The great Japanese bear market now has lasted twice as long as any other secular bear market on record. Twenty years of zombie banks, weak political leadership, relentless deflation and broad-based despair have wreaked havoc on investor confidence. The recent earthquake and tsunami are just the latest in the long list of Japan’s woes.
But just as the exuberance around Japan’s prospects was irrational in the 1980s, today’s despair about Japan’s prospects is just as far off the mark.
Since the collapse of the Nikkei in 1989, trading volumes in Japanese small caps have all but evaporated. Investment banks and brokerages produce next to no research on the sector. And what little research there is, it rarely gets translated into English. After all, individual Japanese investors dominate the small caps, accounting for 60% to 80% of trading on JASDAQ, Japan’s version of NASDAQ.
Yet, by any objective measure, investors have never seen such low valuations in the history of a developed economy. Today, Japan has as many as 200-listed companies trading below cash on the books. That means you can buy these companies for free. Warren Buffett’s mentor, value investor Ben Graham, would have a field day.
Fortunately, investing in Japanese small caps isn’t as difficult as investing in rice. TheWisdomTree Japan SmallCap Dividend (DFJ) — a current recommendation in my Alpha Investor Letter — boasts some stunningly low valuations. As of March 31, 2011, the companies in this ETF were valued at a mere 0.36 times price to sales and 0.78 to book value. By way of comparison, Nasdaq stocks now trade at 2.4 times sales and 3.72 times book value. That means that Japanese small caps could rise over four-fold before matching U.S. valuations.
So there you have my two top “investments of the decade”…
With investing directly in rice still a difficult proposition, my top pick, by default, is Japanese small caps stocks.
Go out and buy some for your portfolio today…
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