Commodities

Barefootwoman

Level 2 Member
Do any of you play in the commodities market(s)?

From what I can tell from a friend of mine who's been playing (on a small time basis) for over ten years, it seems similar to poker or blackjack, where, (depending on the house/game rules) and the skill of the player, an advantage might be obtained - again with skill and over time.

I'm interested in learning more about it, I've been poking around on Options Express, watching repeats of Trading Places (sorry, had to lighten it up) and just generally reading. I don't have much time for it right now, but it interests me enough that I might try to learn more about it slowly over time.

His profits are small (usually less than $200 per trade) but it happens often enough to add up. He has losses too of course.

Obviously, any play is on the side and outside of a typical, long term portfolio - again, much like a trip to LV.

I am just curious to see if others are into this. My sense is that small time players are few. I could be wrong...still curiousl
 

Matt

Administrator
Staff member
If you look at like a hobby to pass the time, and can afford to lose all your assigned money then go for it. I personally am suspicious of people who claim to be successful at this, yet don't make big bucks or who have their own hedge funds and private offices... something doesn't add up.

Also - note that commodity markets aren't behaving as planned right now, so be ready to think outside the box with them.

Personally, I'd not do this, but everyone needs a hobby..
 

MileHighYuppie

Level 2 Member
As someone with a Masters in Finance and hedge fund experience, I'm always curious as to why someone outside of a professional firm feels that they would be able to consistently beat the firms who research and trade commodities/stocks/bonds/currency all day, every day, with billions of dollars in capital and thousands of analysts, researchers, and industry contacts.

For every trade you make, there is someone on the other side of that trade, betting against you. Before entering that position, do you feel you have done more research than they have, that you have analyzed that data more correctly than they have and that you have run the correct risk analyses and regressions to properly value that trade?

As Matt pointed out, if someone is good enough at trading commodities to consistently return outsized profits, they would be running billions in AUM within a year.

If you look at it in the same light as gambling, go ahead and look at your losses as the cost of entertainment and the profits as a nice perk, but certainly not an investment strategy. I prefer blackjack and sports betting, but to each their own!
 

Barefootwoman

Level 2 Member
Obviously, any play is on the side and outside of a typical, long term portfolio - again, much like a trip to LV.

Hence my comment above in the original post. I am getting bored with casinos and I don't touch my core portfolio except to add funds or rebalance. This seems like a diversion, something new to learn about, make a little scratch, lose a little scratch.

I'm always curious as to why someone outside of a professional firm feels that they would be able to consistently beat the firms who research and trade commodities/stocks/bonds/currency all day, every day, with billions of dollars in capital and thousands of analysts, researchers, and industry contacts. Hey, even firms who do research don't seem to beat the indices :)
 

Hanaleiradio

Level 2 Member
This seems like a diversion, something new to learn about, make a little scratch, lose a little scratch.
You're almost certain to lose in the short run. Learning curve in every commodity asset class is very steep, and every aspect of commodity markets has changed enormously over the last decade, with many small and midsize firms closing shop because they simply can't compete with the research and trading prowess of the big players that have entered the market. Ags--particularly corn and soy--are the easiest to learn, and have a handful of major "events", like the usda reports and weather during tossling, that you can gamble on what the impact will be with simple long or short trades. Sometime you will get it right--like playing red or black on the roulette wheel. But those events probably won't provide frequent-enough action for someone looking for an alternative to the casino.
 

rajin

Level 2 Member
Where you you think you're going to find an edge? A poker edge is really due to other players. Unless you think you can find a (real) pattern or have some kind of inside info, I don't know how you'd expect to be better than average over the long-term.
 

Barefootwoman

Level 2 Member
Where you you think you're going to find an edge?

I'm just now learning about this, but the basics appear to involve watching movements (obviously) not playing in the middle (approx equal bulls and bears) studying the history of certain commodities, looking for liquidity, knowing how currencies move against each other, etc. etc. Again, I repeat that it's gambling, but over time seems you can use knowledge (personal experience, general market knowledge and commodities newsletter reports) to improve your predictions. My friend has always played the pigs get fat, hogs get slaughtered philosophy - it does seem to require more control of one's emotions than regular stock trading. Lots of psychology involved.
 

GettingReady

Level 2 Member
When I was 17, I decided I had an addictive type of personality and made a decision it would be better to stay away from things that could potentially feed into that. Never got into alcohol, drugs, or gambling even when I lived in NV. Smoking was short lived. Playing this game is addictive enough but relatively safe, in that I'm far too disciplined (financially) to risk doing something that could negatively impact our pending retirement even as a hobby.
 

Saphira2021

Level 2 Member
as someone who is required to know about commodities, i can tell you unless you have an inside, don't. and if you have an inside, then don't either because that is called insider trading.
commodities market is so bad that most funds are getting out. used to be everyone was into them and did well, it is done now. if you are into playing games and not short term, look into private equity. that may be very lucrative, but you better know what you are doing and there are no small players in that area, at least from what i see.
just my 2 cents
 

Barefootwoman

Level 2 Member
I hear all the arguments against it and they make sense....except I have this close friend who's been making a decent side income this way, for 10 years. Whenever he describes it to me, I see an analogy to under the radar MS or certain types of poker playing. If you can be content with consistent small amounts (less than a few hundred dollars each)....well, it works......where most of us fail is it's human nature to try to make something scalable.
 

Matt

Administrator
Staff member
I hear all the arguments against it and they make sense....except I have this close friend who's been making a decent side income this way, for 10 years. Whenever he describes it to me, I see an analogy to under the radar MS or certain types of poker playing. If you can be content with consistent small amounts (less than a few hundred dollars each)....well, it works......where most of us fail is it's human nature to try to make something scalable.
Making sense is important. Very important.

I know that this may be offensive, but try to consider it objectively, and in that I don't want you to lose money.

There's two possible truths here:

  • Your friend has been able to consistently earn money with a system and knowledge of this over 10 years.
  • Your friend is lying.
My background is:

  • Drinks (parents worked in nightclubs, father liked a drink a bit too much..)
  • Gambling (I worked my way through senior year of college in casinos, and traveled for a bit after that using the skills)
  • Finance (I work as an advisor now, and see a lot of people selling half truths)
In part 1 and 2 of the above, denial is rife. People want to portray that they don't have a problem, and might even lie to themselves, which then becomes part of grand storytelling. You only hear about the good times, the wins.. the losses are skirted around, or outright hidden.

In part 3 I know a real truth: if something 'works' for 10 years then it works for $100s, $1000s and millions.

Its a system. A system that works (especially for 10 years) works regardless of what you push through it. To say it works only for $100 or so is the snake oil pitch that people who don't have a system (in the finance world) that works..

Stay away!!

Or.. get involved, but only with your Vegas money.. something that has no impact if you lose it, and only if that is worked into a budget.

I wouldn't touch this with a 10ft pole.

Again, only trying to help you not go there, friendship complicates things. Try to take the Occam's Razor approach, if they have a system that works, but only for a bit? Vs They don't want to admit that they aren't an authority on a matter, and have lost too much already.
 

Barefootwoman

Level 2 Member
Not offensive at all, I get where you are coming from. It's been me trying to poke at him for more details, he gets mum about it because he doesn't want me to lose any $$$ and then turn around and blame him for it and there goes this unique 25 year and rare type of friendship that we share.

From the sketchy details he provides, I can somewhat gather what he's up to..... in the late 90s, investing in Y2K remediation companies was a big deal in the stock market. Instead of going for the big kill, we'd ride a couple of them up and down and found a way to consistently buy low and sell high, since there were highly predictable patterns (I think there was quite a bit of signalling going on)....we only made like $200 per trade after taxes, but we did many of these trades, but nothing lasts forever, we all know that....I think he's been doing the commodities since then. The only time I saw him break a sweat was the time he almost forgot to sell and was worried about tractor and trailer loads of corn (or some other type of grain I forget LOL) being delivered to his house.

It's more along the lines of trying to find a small advantage over the house - mostly just a day dream, but it's fun to dream as long as you have a grip on reality.
 

Matt

Administrator
Staff member
Not offensive at all, I get where you are coming from. It's been me trying to poke at him for more details, he gets mum about it because he doesn't want me to lose any $$$ and then turn around and blame him for it and there goes this unique 25 year and rare type of friendship that we share.

From the sketchy details he provides, I can somewhat gather what he's up to..... in the late 90s, investing in Y2K remediation companies was a big deal in the stock market. Instead of going for the big kill, we'd ride a couple of them up and down and found a way to consistently buy low and sell high, since there were highly predictable patterns (I think there was quite a bit of signalling going on)....we only made like $200 per trade after taxes, but we did many of these trades, but nothing lasts forever, we all know that....I think he's been doing the commodities since then. The only time I saw him break a sweat was the time he almost forgot to sell and was worried about tractor and trailer loads of corn (or some other type of grain I forget LOL) being delivered to his house.

It's more along the lines of trying to find a small advantage over the house - mostly just a day dream, but it's fun to dream as long as you have a grip on reality.
It's totally safe providing you don't get in too deep. If you want the learning curve and excitement and can get it from an amount that doesn't have an impact on any major life goals, go for it.

If it only 'feels right' when the stakes are higher.. probably not the right thing.

Glad that I didn't piss you off royally!
 

stlcole

Level 2 Member
I really like Matt's post because I think it drives to the heart of the matter. I imagine my young son saying his friend never burns his hand when he touches the hot stove. Everyone above writes that commodities are like a hot stove, but let me try to explain why its 'hot', or at least why putting money elsewhere is a much better idea. So at the risk of far too many sweeping generalizations which allow everyone to project their own thinking about modern finance, I want to write about companies vs commodities...

All companies, when lumped together, make good returns over time, generating significant income, some of which is paid as as dividends and and the majority is reinvested. The reinvestment grows their capital, which combined with the good returns over time, grows income, and so on...

The point is that investing in companies is a winners game in that the aggregate of all companies, over reasonably decent periods of time, generate more and more and more income a portion of which you own. Better, your ownership of this income grows if you reinvest your dividends. If you have shares in some of these companies (that is, you own stocks), you have a share in this winners game.

A commodity, such as oil or gold, does not have an intrinsic property which enhances its value day after day after day. So a commodity doesn't have the means to generate returns which can be used to generate more returns. The trading of gold for silver for oil for whatnot is a zero-sum game. Your guess is unlikely to be any better than anyone else's unless you spend your proverbial 10,000 hours acquiring necessary skills. Further, owning a commodity has an opportunity cost because the cash which purchased the commodity could be in the bank earning simple interest.

The commodity business (as opposed to the stuff itself) is a business which involves futures (and all sorts of mind bending derivative instruments), which means it is a finance business, most of which is conducted on exchanges, subject to significant swings in supply and demand, and capricious changes in oversight, regulation, and counter-party behaviors, etc. The commodity finance business is one which could be lumped into the idea of 'all companies' and 'winners game', but it is a tough business.

The macro point is companies provide income and commodities don't (and in fact have an opportunity cost which is rarely repaid unless you are dabbling with futures). Don't you want to own things that pay you to own them? (And if you want to buy futures... re-read the above posts, or go touch the stove and see if it burns your hand.)

('Scarcity' does not mean that a commodity will be worth more. The real prices of scare commodities over long periods of time tend to decline. There are always some stories about individual commodities just as there are about individual stocks, but we are talking about these things in aggregate. At the risk of undermining the whole 'in aggregate' point, consider that the real price of oil today is worth a lot less than in the 70s. This price decline suggests we aren't running out of the stuff, but in fact have more of it relative to our needs than we used to. And if you really want to see the real price of oil drop, start taxing carbon emissions, or have China improve its air pollution.)

(If someone wants to say, "Oil is very geopolitical, so if you need to pay to have the US invade a country, oil prices go up, and if Russia invades the Ukraine, oil prices go down," I wouldn't argue.)
 
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Saphira2021

Level 2 Member
Stay away!!

Or.. get involved, but only with your Vegas money.. something that has no impact if you lose it, and only if that is worked into a budget.

I wouldn't touch this with a 10ft pole.

Again, only trying to help you not go there, friendship complicates things. Try to take the Occam's Razor approach, if they have a system that works, but only for a bit? Vs They don't want to admit that they aren't an authority on a matter, and have lost too much already.
Absolutely true

And the pole is too short
 
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