Skip to main content

Caution on commodities

I read an interesting piece by John Authers over the weekend, in which the Financial Times columnist urged investors to familiarize themselves with the basics of the commodity markets before jumping in.

Since the start of this decade, performance in a wide range of individual commodities has been hot, prompting many new investors and funds to jump on the resource bull market bandwagon.

Authers reminds prospective investors that there are factors which distinguish the commodities market from other investments long familiar to most professional investors (equities, bonds), and that each individual commodity bears its own unique fundamentals and behavioral patterns.

Take it, John:

The first rule of journalism, some say, is: "Never be afraid to admit ignorance."

In that spirit, I will admit that I took over this column without the faintest idea why aluminium prices might behave differently from nickel, or why corn prices diverge from wheat. I am not embarrassed by this. The world of commodities is huge and complex, governed by the peculiarities of demand and supply in particular markets across the world. Little or nothing you learn covering mainstream financial markets, such as equities and bonds, much helps you when you are looking at a report on copper supply.

What I do know is that the past few years have seen an explosion of interest in commodities, not only from hedge funds but also from mainstream big institutions. That was prompted by the prolonged rally in basic commodity prices that started earlier this decade. The entry of new investors helped push the market still further. But my fear, confirmed at least by anecdotal evidence, is that many of these new investors share my ignorance of commodities.

You can read the entire piece here, "Go back to basics before you buy commodities".

For more info on two very important themes stressed in John's article, the increased correlation of stock and commodity returns and the "non homogeneity" of individual commodities, see, "Double down on commodities?" and, "Stocks and commodities positively correlated".

Popular posts from this blog

Lessons from Hedge Fund Market Wizards: Scott Ramsey

Today we continue our series, "Lessons from Hedge Fund Market Wizards" , with a look at Jack Schwager's interview with Scott Ramsey of Denali Asset Management.  Ramsey, a futures trader and CTA who works on the island of St. Croix, spoke to Schwager about his first foray into the markets, his evolution as a trader, and the process he stands by to protect and grow his clients' money. 1) . Ramsey started trading in college. He was roped into the OTC metals market via a broker's ad in the Wall St. Journal. The broker charged customers a flat fee to buy and sell as much as they wanted in a particular market for six month. At the time, Scott was a novice and didn't know about futures, so he traded metals in this fashion through the inflationary run-up of the late 1970s. 2) . Scott had to rethink his trading strategy after he bought silver at $50 an oz., only to watch it collapse to $26 following a long string of limit-down days. He sold as soon as the market...

How to "Pull the Trigger" on Your Trading Ideas

In our last post, I quoted hedge fund manager, Jim Leitner on the importance of following up on your investment ideas.  Today I'd like to follow up and share some thoughts on how you can learn to consistently "pull the trigger" on your best trading setups and investing ideas. In order to help you do that, we'll take from the best and offer up key insights from interviews with top traders and trading psychologists like Alan Farley, Brett Steenbarger, and Doug Hirschhorn .  Now before we get to their key insights on overcoming trading anxiety and pulling the trigger on your trading ideas, let's remember what Jim Leitner said in his interview: "Learn to love to listen to people and when you hear something interesting, follow up on it. Don't just think, "Well that's an interesting idea" only to find out a year later that the company you could've bought shares in is now up 500-fold. You never want to say woulda, coulda, shoulda...

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi...