How He Went From Billionaire to Hobo
What’s the quickest way to lose $32 billion?
Well, one option is to pile $32 billion in cash into a giant mountain, and burn it.
Another is to invest it all in commodity-related investments with a “buy-and-hold” mentality.
Brazilian businessman Eike Batista went for option #2.
In 2012, he was the seventh-richest person on the planet, worth an estimated $32 billion, according to the Bloomberg billionaire index.
Guess what his net worth is today? You won’t believe it…
In 2012, when he was worth $32 billion, he made international news headlines saying: “I will be the world’s richest man.”
What was his brilliant strategy to achieve this?
He put all his money in a leveraged bet that commodities would go up.
All of his companies were commodity-based businesses, including an oil driller, a mining company, an electricity producer and a port operator.
So when commodities started to crash in 2012, Batista’s wealth evaporated.
In fact, four of his companies went bankrupt as falling gold and iron ore prices destroyed his “long only” commodities empire.
Today, he’s known as “the negative billionaire” because he owes creditors $1.2 billion.
Yes, that’s right. He went from a net worth of $32 billion to more than a billion in debt.
No one should feel sorry for Batista. He got what he wanted—a roller coaster ride of chaos. Bottom line, these stories of super leverage and one-way bets are pretty typical across the history of markets.
The “Braindead” Way of Losing Money
I’m telling you his story because the collapse of his empire teaches a powerful investment lesson…
Buying and holding commodity-related investments is a clueless strategy. I like to call it the “braindead” way of losing money.
When it comes to investing, timing is everything. You must know the right moment to get in and out of certain sectors and asset classes.
This is especially true for commodities, since they’re very cyclical.
Take a look at the 20-year CRB commodity index chart below. Does that look like a good opportunity to use a “buy and hold” strategy?
Yes, over the last twenty years there have been some incredible trends in commodities.
But you can’t profit from those trends if you’re simply buying and holding or taking tips from watching CNBC.
You have to know when to get in and get out with concrete rules.
If you’re using a trend following system, it’s relatively easy to capture the big trends.
For example, my proprietary trading system triggered a sell signal in August of 2014.
If you had followed that signal, you could have profited from the collapse in commodities by shorting them. At a minimum, you would have avoided the meltdown.
My Brazilian ex-billionaire friend only needed a few rules to save his fortune, but hubris sank him instead.
How to Know Who’s Swimming Naked
Warren Buffett once said: “When the tide goes out, you learn who’s been swimming naked.”
Well, whenever the trend turns, “buy and holders” are always the ones swimming naked. Always, like clockwork.
Major trends in many commodities changed in 2011. Since then, they’ve been extremely weak. This is why Batista lost so much money.
The “tide” in commodities is out. Batista had been swimming naked.
After such a big crash in the price of commodities, I have no doubt we could see a directional change again in the near future.
How soon? It’s impossible to say.
The best we can do now is to watch the trend. And wait for the trend to turn. Then, and only then, you can follow the trend.
Based on my proprietary system, long-term trends in many commodities remain down, despite recent short-term rallies.
In fact, across commodities markets only gold and gold stocks are in “buy mode.”
For that reason, it makes sense to avoid “long” commodity investments, except gold and gold stocks.
Of course, the trend will change at some point. You need to be ready with a plan of action when that happens.
That’s the key, to know when to jump back in. I’ll let you know when the time comes.
Please send me your comments to email@example.com. I’d love to hear your thoughts. Please tell me exactly what you think. Don’t sugar coat it!