Expert: Paul Henneman - 12/3/2008

Question
Hi again Paul,

I was reading about how hard asset stocks with underlying commodities can be an inflationary hedge. I then came across s few mutual funds investing in agriculture & natural resources.

It would seem to me that investments in all natural resources & particularly investments in crops would be a good idea. I just wonder why there aren't many more of these agricultural & natural resource funds full of investors.

My reasoning is that as human population, global warming, drought, etc. increases, crops & natural resources should naturally dwindle, thus driving prices up.

Could you please explain to me anything I may be missing here?

Thank you greatly.

Mike E.

Answer
Mike,
   Thank you for your question!
Yes, you are probably right long term. But most investors think short term, and in a global economy that is in recession, there will almost certainly be a declining demand for resources and even crops. People still need to eat, but typically less expensive food stuffs during economic downturns.  This can cause a slide in even natural resource and crop oriented stocks. The recession may very well last a few years. Lets say these industries decline by 20% in value. That means that even after the recession is over, investments would have to make that shortfall up before being positive again.
    I am not saying that there will be slide in these types of stocks for certain, only that is the type of worry that prevents many investors from putting their money there.
    In addition, much the same thing could be said for many other industries, which is why the normal state of the stock market is up, over long periods of time. For example, technology continues to improve, is used by more and more people around the world to do many more tasks, is faster, cheaper, and continues to grow as a part of our daily lives. Yet technology also can see less demand during a global recession.

As long as you have a 15 year or longer investment time frame, not much could go wrong with what you are thinking about.

I hope that this helps, please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com