Wednesday, August 6, 2008

Investing vs. trading

Yesterday I posted the virtues of risk management and compounding. For traders that is the safest way to amass and keep long term gains in the market. It's how a trader can grow his capital over time. I showed what the power of compounding over a modest 20 year period would do for an original $100,000 nest egg.

There is another way to get rich. That is to get in a secular bull market early and hold on. This is how many billionaires are created. Warren Buffett bought the bottom of the bear market in 74 and held on. Jim Rogers and T. Boone Pickens spotted the bottom of the commodity cycle and both have made fortunes.

Many in the media are trying to call the current rise in commodities a bubble. Ridiculous. You need oversupply and massive public participation for a bubble to form. Commodities are simply deflating because of demand destruction brought on by the global recession. Once the recession ends demand will return and commodities will turn around and move higher. They will continue this trend until enough supply is brought on line to swamp demand.

We are going to get another great buying opportunity sometime in the future probably at the bottom of the current recession, when things look bleakest, to get back on the commodity bull. Those that can buy and hold will make tremendous returns probably far in excess of what is possible compounding over a 20 year period. They will do it in a much shorter period of time also.