Author Topic: Commodities  (Read 6654 times)

AgileTurtle

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Commodities
« on: November 13, 2014, 06:56:38 AM »
Anyone here trade commodities? Seems like most people plans are index investing or real estate investing. I worked for an energy hedge fund for a bit and those guys did fantastic. I never really had enough extra money to attempt to get into commodity trading. They all told me that equity trading is far more difficult than commodities and it is foolish to trade equities (I think most here agree). Anyways, just wondering if anyone here trades commodities and what your strategy is?

DaKini

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Re: Commodities
« Reply #1 on: November 23, 2014, 07:48:26 AM »
My allocation contains 10% (of my risky part of portfolio which is 80%) of  iShares EXXY which contains futures on the most important industry commoditys. This position is meant mainly as a diversificator to my stocks portion.

hodedofome

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Re: Commodities
« Reply #2 on: November 23, 2014, 12:15:14 PM »
I have DBC and GLD as ETFs that I will buy as part of a global momentum portfolio. However, I'll only own them if they are outperforming everything else. Buying and holding commodities is a poor investment over the long haul.

I don't trade futures contracts as my account size is not large enough for my risk tolerance. Perhaps if I'm trading millions of dollars I'll run a CTA style strategy but for now ETFs serve me just fine.

IMO the 'difficulty' in trading comes from trading markets with lots of smart traders doing the same as you. There are plenty of guys trading large caps as well as commodities. About the only persistent edge I can see in commodities is in the long term trends that hedgers play a part in creating. However, if you look at small and mid cap equities, you can find yourself only competing with a few others. Not to mention, a stock that is growing earnings at 50% a year is almost impossible to price correctly. It can be an incredibly inefficient space.

All trading is hard, but you can make it more difficult by competing with a lot of smart people, or make it easier by competing with a few.

RyeWhiskey

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Re: Commodities
« Reply #3 on: November 23, 2014, 02:06:07 PM »
Commodities aren't really an investment, per se, as they produce no real return over time. They can serve as an adequate diversifier, however, if one is inclined.

The way I see it, our lives are already filled with and dependent upon so many commodities, why leverage a portion of one's investments as well?

eudaimonia

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Re: Commodities
« Reply #4 on: November 24, 2014, 01:15:44 PM »
I trade commodities spreads but don't talk about it here since everyone is about boglehead style investing. Agree with the other posters that this isn't something to invest in per se but rather something to trade. My mentor is a former fund energy trader. I trade some of that but am partial to interest rates and grains (which is what I started with). The returns you can make in this business would snap the heads off most boglehead investors (and even real-estate guys) but you have to know what you are doing and to do that be willing to learn the business.

What role were you doing at your former fund? Depending on your role you might be able to get into doing PJM (physical power) at a utility and learn the ropes that way. Lot of money in that area right now.

AgileTurtle

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Re: Commodities
« Reply #5 on: November 24, 2014, 01:51:49 PM »
I trade commodities spreads but don't talk about it here since everyone is about boglehead style investing. Agree with the other posters that this isn't something to invest in per se but rather something to trade. My mentor is a former fund energy trader. I trade some of that but am partial to interest rates and grains (which is what I started with). The returns you can make in this business would snap the heads off most boglehead investors (and even real-estate guys) but you have to know what you are doing and to do that be willing to learn the business.

What role were you doing at your former fund? Depending on your role you might be able to get into doing PJM (physical power) at a utility and learn the ropes that way. Lot of money in that area right now.

I worked in IT at the fund they did both physical power and commodities. I saw what kind of % returns they were making and it was insane. I understand that it is not so much investing as a skill that in itself earns money.

I have no interest in being a landlord if I wanted to work construction and manage properties i would do that. I like trading stocks but it seems like the poor mans version of futures if you want to trade and not invest. Trading seems like it is a skill that is very valuable to become FI and I dont get why it isnt more popular.

Do you think getting a mentor to teach you the way is the only way? Or is it learnable on your own? I still need to build up enough disposable money anyways, it is going to be a few years.
« Last Edit: November 24, 2014, 01:54:19 PM by AgileTurtle »

hodedofome

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Re: Commodities
« Reply #6 on: November 24, 2014, 02:04:31 PM »
I learned on my own. I wish I had a mentor, that would have been easier I believe. I've read about 50 books so far and I follow 100+ trading/investing blogs. When I first started out I followed a lot of pro traders on twitter. My personality is conducive to being self-taught, some may need a mentor because they won't spend the time alone to learn like I did.

The most important thing, however, is that you find a strategy that suits your personality. Just because some people you worked with doubled their money every year or two by trading energy futures, doesn't mean you would. And it won't have anything to do with your intelligence, but rather your personality. You may be more suited to special situation investing or quantitative/mechanical systems. In your journey you'll hopefully figure out what suits you the best, and become an expert at it.

AgileTurtle

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Re: Commodities
« Reply #7 on: November 24, 2014, 02:10:15 PM »
I learned on my own. I wish I had a mentor, that would have been easier I believe. I've read about 50 books so far and I follow 100+ trading/investing blogs. When I first started out I followed a lot of pro traders on twitter. My personality is conducive to being self-taught, some may need a mentor because they won't spend the time alone to learn like I did.

The most important thing, however, is that you find a strategy that suits your personality. Just because some people you worked with doubled their money every year or two by trading energy futures, doesn't mean you would. And it won't have anything to do with your intelligence, but rather your personality. You may be more suited to special situation investing or quantitative/mechanical systems. In your journey you'll hopefully figure out what suits you the best, and become an expert at it.

That is interesting about the personality. When i worked there and have meet other pro traders ive tried to find at least one that is simalar to me. My hopes was to befriend them and get some information out of them. But at least the place I worked they were all super aggressive type A. The VPs were the same, so I am guessing they hired a ton of similar people. Or maybe there is a reason people like me werent there. Really laid back type. 

DaKini

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Re: Commodities
« Reply #8 on: November 24, 2014, 02:52:23 PM »
I trade commodities spreads but don't talk about it here since everyone is about boglehead style investing. Agree with the other posters that this isn't something to invest in per se but rather something to trade.
Please tell me more about this!

eudaimonia

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Re: Commodities
« Reply #9 on: November 24, 2014, 03:30:29 PM »
I learned on my own.

Mad respect to you for learning this business on your own.

@AgileTurtle

Was the fund HFT/algo driven with a bunch of quant types or macro driven? I'm guessing the latter. With your IT background have you looked at the quant side of the business? I totally agree with hodedofome that you need to find something that suits your personality.

@DaKini

What specifically would you like to know?

DaKini

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Re: Commodities
« Reply #10 on: November 26, 2014, 12:21:03 PM »
I wanted to learn the reasons why commoditys arent for investing per se, but for trading.
As you can read above i hold some commodity etf for diversification (which worked so far), what do you think about it and why?

steveo

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Re: Commodities
« Reply #11 on: November 26, 2014, 01:58:09 PM »
I wanted to learn the reasons why commoditys arent for investing per se, but for trading.
As you can read above i hold some commodity etf for diversification (which worked so far), what do you think about it and why?

I think its a good idea. I reckon most of your portfolio should be in stocks and the house you own however some diversification is a good idea and commodities is a good way to diversify.

eudaimonia

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Re: Commodities
« Reply #12 on: November 26, 2014, 01:58:25 PM »
I wanted to learn the reasons why commoditys arent for investing per se, but for trading.
As you can read above i hold some commodity etf for diversification (which worked so far), what do you think about it and why?

Commodities themselves don't generate cash flow like a business does and therefore do not increase in value. At best they are a hedge against high inflationary periods and you'll see that they tend to go up in price during those periods and go down in prices during deflationary cycles.

Take a look at this 100-year inflation adjusted chart for gold: http://www.macrotrends.net/1333/gold-and-silver-prices-100-year-historical-chart

For the past 100 years the price has gone from about $425 in 1915 to about $1200 today. That is a 183% increase over 100 years or about 1.83% per year. Factor in the non-trivial carrying cost (storing gold isn't cheap) of 1% per year and you are down to .83% per year. Want to exchange that gold for something else - there is a fee for that as well.

Other commodities have a similar or worse long-term return. Take a look at the price of corn - it has been going down steadily for the past 50 years.

As far as your EFT working so far - define working? Are you trading in and out of this position, accumulating position for the next inflationary cycle or something else?

To be clear I'm not saying one cannot make money in commodities; however, a buy and hold approach is not effective in the long-term (20 year+ cycle).

index

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Re: Commodities
« Reply #13 on: November 26, 2014, 02:04:54 PM »
I am setting the frame work to start a tree farm next fall. The outlay will be around 30k at should net around 700k 25 years from now. Throwing off a little cash flow from a few acres of Christmas trees in the interim. I guess timber is a commodity right? 

eudaimonia

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Re: Commodities
« Reply #14 on: November 26, 2014, 02:18:37 PM »
I am setting the frame work to start a tree farm next fall. The outlay will be around 30k at should net around 700k 25 years from now. Throwing off a little cash flow from a few acres of Christmas trees in the interim. I guess timber is a commodity right?

I would say that what you are doing is essentially farming in the timber industry which is a business and not really an investment in commodities per se. I wasn't suggesting that corn farmers don't make a profit in my previous post but rather that holding a speculative position (as opposed to hedge which may farmers do) in corn is not a wise long-term investment.

hodedofome

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Re: Commodities
« Reply #15 on: November 26, 2014, 08:05:54 PM »
When you start thinking about commodities as a hedge, and you look at the long term returns and obvious up and down trends, you naturally find yourself trying to time the market. Why hold gold for the 20 years it sucks? Why couldn't you just find a way to hold it for the 10 years you really need it? This usually leads to tactical asset allocation ala Meb Faber and his Ivy Portfolio. It works. Diversify and only hold the assets that are going up, because the ones that are going down aren't worth owning.

DaKini

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Re: Commodities
« Reply #16 on: November 27, 2014, 01:09:04 PM »
My approach is that the correlation to stocks and bonds is not 1, so i would buy commodities if they are the cheapest asset relative to all other assets and sell if it is the most expensive one. Usually currently i just buy other assets with new cash inflow as the portfolio is not big enough for big rebalancing actions.
But later when my inflow is dwarfed by the portfolio size, this should lead to sell high-buy low.

steveo

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Re: Commodities
« Reply #17 on: November 27, 2014, 02:04:09 PM »
My approach is that the correlation to stocks and bonds is not 1, so i would buy commodities if they are the cheapest asset relative to all other assets and sell if it is the most expensive one. Usually currently i just buy other assets with new cash inflow as the portfolio is not big enough for big rebalancing actions.
But later when my inflow is dwarfed by the portfolio size, this should lead to sell high-buy low.

I think that this is a good approach. If your portfolio is smallish and you are still working you can put money into whatever asset class looks best at that time within reason. If gold is always cheap and you end up with a massive gold portfolio I think your long run returns will probably be poor.

I would though think about asset allocation and invest in that fashion. In my opinion commodities should not make up a significant proportion of your portfolio as they are not businesses that are earning money.

DaKini

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Re: Commodities
« Reply #18 on: November 28, 2014, 07:31:47 AM »
Exactly that is the reason its only 10% of my allocation.
In the case would have a massive gold portfolio i would also have a massive stocks portfolio. In case the 10% would always eat my money, its would have to drop hugely all the time like a black hole with no end which is not possible despite the world coming to an end. The etf mentioned above is quite diversified for that reason, i would never ever invest directly in gold only.
When companys produce goods they need ressources, if demand rises so does the commodities price (usually at least).

What is your opinion on the contents of the specific etf i mentioned above?

steveo

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Re: Commodities
« Reply #19 on: November 28, 2014, 05:59:37 PM »
I don't know that specific ETF however I still like the idea of having some commodities within your portfolio if you can do it cheaply. Its just a hedge.

In stating all of that I think commodities could help your portfolios performance. There will be times commodities go up a lot more than stocks simply because of demand and supply as well as the way markets work (bull and bear markets). If you can sell when the commodities/stocks are way too high and re-balance at that time (it doesn't have to be perfect) my assumption is that you will come out ahead and have a more balanced performance.

Buffaloski Boris

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Re: Commodities
« Reply #20 on: August 07, 2020, 08:11:40 AM »
This is an interesting if old thread and relevant given the high price of other assets. Including gold. Seems like commodities are part of a diversified portfolio.

 Are you investing in commodities and if so how are you going about it?

vand

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Re: Commodities
« Reply #21 on: August 07, 2020, 09:46:43 AM »
Yeah, adding some UK:AGCP. Don't anticipate holding more than 2-3% of my total portfolio, and it's more as an inflation hedge should we get a rerun of the 1970s or worse. I think my PM holdings will do fine as an inflation hedge too, but as you know I love being well diversified with tilts towards value.

Also more aggressively accumulating Platinum which is an interesting play both as a PM and an industrial metal.  I consider by far the best play in the PM sector right now. I wouldn't put all my PM allocation into platinum though, but imo it's worth 10-20% of your PM allocation.

Buffaloski Boris

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Re: Commodities
« Reply #22 on: August 07, 2020, 01:03:56 PM »
Yeah, adding some UK:AGCP. Don't anticipate holding more than 2-3% of my total portfolio, and it's more as an inflation hedge should we get a rerun of the 1970s or worse. I think my PM holdings will do fine as an inflation hedge too, but as you know I love being well diversified with tilts towards value.

Also more aggressively accumulating Platinum which is an interesting play both as a PM and an industrial metal.  I consider by far the best play in the PM sector right now. I wouldn't put all my PM allocation into platinum though, but imo it's worth 10-20% of your PM allocation.

Yeah, Iím liking the value aspect and inflation hedge. Commodities have just gotten hammered the last 10 years. So of course Iím interested. Buy the hated, sell the loved.

2Birds1Stone

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Re: Commodities
« Reply #23 on: August 07, 2020, 01:48:52 PM »
Yup, roughly 5% of my portfolio in physical Ag/Au.....since 2012.

Imanuels

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Re: Commodities
« Reply #24 on: Today at 04:05:46 AM »
Is there a reason (apart from currency risk) why you use iShares EXXY instead of ICOM?

My allocation contains 10% (of my risky part of portfolio which is 80%) of  iShares EXXY which contains futures on the most important industry commoditys. This position is meant mainly as a diversificator to my stocks portion.

DaKini

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Re: Commodities
« Reply #25 on: Today at 08:50:56 AM »
It was not available to me when i set up my IPS.

However I sold all of EXXY in 2018. The reason was Future rollover decay.
I also do not have any commodities position right now, apart from some minor physical gold and silver coins i inherited.

Changed plans make my holdings way simpler; to Stocks only, balanced against cash and pre existing old insurance vehicles i donít want to liquidate because of tax stuff and good interest.