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No simple solutions to real life investing

|Includes:BHP, Potash Corporation of Saskatchewan Inc. (POT), SLB
At my annual medical exam last week, my physician told me something that blew me away. Twelve months ago, when I last saw him, he advised me to take selenium supplements. Selenium is a mineral which can be harmful in large doses. In fact, too much can cause side-effects such as hair loss, lethargy, etc. However, your body does need a small amount of selenium for healthy cell functioning. More to the point, many studies in the past suggested that selenium could inhibit the growth of prostate cancer cells. Consequently, physicians across the country have been telling men my age to take a little extra selenium. I followed my doctor's advice, and have been taking selenium for the past year, in addition to some other nutrients such as Vitamin E, which he also recommended.
Last week, after telling me I was in pretty good shape, my doctor told me to stop taking the selenium. Apparently, a new, very large study has been released in which thousands of men were given selenium and Vitamin E over a five and a half year period. The study found that neither of these supplements nor the combination of both reduced the incidence of cancer. In fact, the only thing taking these supplements may have done was give me an alternative explanation for why I lost a little hair and felt tired at times. (Until then I had just blamed the economy.)
Having a background in research, I decided to look up the studies myself to see why the new study produced such different results. Turns out we really can't blame doctors for having recommended these supplements in the past. The early studies certainly did look promising. The problem was that the old studies were done in vitro, meaning in test tubes, while the new study was performed in vivo, meaning with real life patients.
What happens in a living human body, unfortunately, can be a lot more complicated than what happens in a test tube. And while test tube studies can identify new relationships by looking at processes in isolation, those relationships don't always pan out in real life, where many other factors are involved.
So it is in the world of economics and investment...
Economies, like living bodies, are highly complex. As investors, we have to be careful not to look at any one relationship in isolation and make it the be-all end-all. As much as possible, we much stay aware of the interplay between many different relationships and trends.
For instance, let's consider our old friend oil, which is always in the news these days. Today, so far, it's dipped under $70. In honesty, it could fall as low as $60 – temporarily – especially if worldwide growth is weaker than expected. Long-term, of course, I expect oil prices will go much higher. Nonetheless, you will often find oil industry experts extolling ways in which oil prices will stay low, despite rising worldwide demand.
The problem is that experts often overlook the fact that oil does not march to its own drum. One example that comes to mind is a recent article in Scientific American by a Vice President of Eni, a leading Italian oil company. The article makes the familiar case that new technology and conservation might help us stretch out the earth's oil supplies for the remainder of this century.
Like other writers, this VP looks at oil production in isolation. He ignores the interrelationships between oil and other commodities and the role emerging economies will play. Because it takes commodities to produce other commodities, oil is intertwined with a host of other industries in a complex array of relationships. Oil prices depend not just on the global supply and demand for energy, but on the fundamentals of water, copper, iron, nickel, etc. Not to mention emerging market growth, population growth, geopolitics, and other factors. Stress on any one of these factors increases stress on the others.
For instance, another article I came across recently points out that 1.3 billion people today – 4X the population of the U.S. - live on roughly $1.25 a day. Try telling them, from the comfort of your Chevrolet Equinox, that they must limit how much oil, potash, or any other essential commodity they can consume!
Truth is, those poor people are desperate for economic growth to improve their lives. And the only way they can have growth is to ramp up commodity consumption – adding infrastructure, building factories, and ramping up production of goods. You'd do the same in their shoes.
In fact, we really can't have worldwide growth without higher consumption of all commodities. From now on, you can expect to see prices of all commodities rise and fall (but mostly rise) in lockstep with each  other.
Bottom line: stay invested in commodities if you want to benefit from global economic growth. Use dips, such as the one which may be shaping up in the commodity pits at the moment, to add to your positions in companies like Potash (NYSE:POT), BHP Billiton (NYSE:BHP), Schlumberger (NYSE:SLB), and others in our portfolios.
And let's not forget...
We generally separate gold bullion from other commodities because gold functions as a currency more than a commodity. It's more of a savings vehicle than a raw material to be used up. Because the world is complex and risky today, it is all the more important to invest in the ultimate hedge against disaster, which is gold.
Gold makes even more sense when we consider what's currently taking place along the Saudi/Yemeni border. The popular press hasn't picked up on this yet, but it has serious implications.
Yemen is one of the world's poorest nations. For the past five weeks, rebels in the northern part of Yemen (which borders on Saudi Arabia) have been fighting government forces. In their struggle, the rebels are supported by al Qaeda, even though the rebels are Shia Moslems and al Qaeda are Sunnis. Apparently, the particular Shias and Sunnis in this campaign have decided they have a common target of destabilizing Saudi Arabia.
(Not surprising, rumors are floating around saying that Iran is also providing aid to the rebels. A weaker Saudi Arabia, with its oil reserves, would be an easier and more valuable takeover target for Iran than, say, Israel.)
We can't predict the future, but we can imagine the damage the world economy would suffer from an even less stable Middle East.
One final situation that concerns us is the lack of positive signs from the leading economic indicators. This morning's figures show another month of gains, but only in 60% of the indicators. No recession since the 1960s has ended without at least one month in which 100% of the indicators showed gains. The danger is that the market, which has been betting on a vibrant recovery, could be disappointed.
Because the headwinds today look stronger than the tailwinds, continue to hold zero coupon bonds, in addition to gold, for protection against a downturn in the market.
P.S. My doctor has now recommended I start taking Vitamin D, which the latest research suggests can protect against certain forms of cancer. Like the informed patient I try to be, I looked up the studies on Vitamin D (which were positive) and am now taking it. I'll try to keep you posted on whether this supplement proves truly beneficial over time.

Stocks: POT, BHP, SLB