Las Vegas is my idea of living hell. Apart from the absurdity of vacationing indoors in air-conditioned mega malls and hotels to escape the desert heat, a vacation designed around the lure of the ‘big win’ is not luring to me in the least. I am admittedly not a gambler. I don’t derive any utility from playing the odds and making bets to better my financial situation, and would much rather exchange my money for an ownership stake in equity stocks or real estate.
This isn’t to say that I am more risk averse than the average person, I actually think I might be less risk averse, but I do try my hardest to make smart decisions with my investments and casinos certainly do not fit the bill.
So what do casinos have to do with Futures trading?
Same game, different venue. Punters making bets and trying to beat the house (or the exchange). Casino gamblers have countless tricks to gaining a perceived edge and admittedly, some tricks like card counting, can get you a bit of an edge, but no guarantee. Same with the futures market. Those who can follow weather and supply trends and stay on top of other indicators like interest rates and oil prices, and the millions of other variables that come into play, may have a perceived edge, but do they have a real edge? Or, if they do have a real edge, does the market change too quickly for them to be able to act on that edge? Maybe they think they are acting on the edge, but are really just getting lucky?
What I have determined from my week of trading.
- The markets are volatile. To get an edge is a full time job, and as mentioned above, given the sheer quantity of factors influencing the market, I am not even sure it is possible to get an edge. More likely, I think you just get lucky.
- The markets are fickle. Which goes hand in hand with volatility, but I like to think that volatility follows more of a predictable pattern (weather, supply, etc.) whereas fickleness is impossible to predict… maybe everyone had a dream about popcorn last night and everyone decide to go long on corn futures, who saw that coming!
- It’s all gambling. Unlike with equity stocks where you can examine a balance sheet, read earnings reports, scrutinize the details (as Mr. Soros would do), you can’t do that with futures. You are looking at the current market situation and making a guess about which way prices will go. The 50/50 odds don’t hurt though.
- No Cash. No Problem. The low barrier to entry (only having to put up a margin) makes it more attractive to gamblers. If you had lots of cold hard cash, you would likely buy a more secure stock… but as we all know, good stocks (especially ones that pay dividends) can be expensive and you have to pay up front. The futures platform lets you profiteer from products you don’t produce, own or really want to acquire, at a fraction of their real price. This is an alluring proposition to those who can stomach the risk, like taking out a loan to go to the casino.
Give me the Social Goods
There does not appear to be consensus regarding the effect of the futures markets on commodity prices. Some say they do in fact make prices higher, others say they don’t have a lasting effect as they have no bearing on the availability of land, cost of production, weather, and all other things that do influence the real price of commodities. However price volatility has increased markedly in commodity markets in the last 10 years, while trading has hit 10+ times the volume of actual commodities that are being produced. I am not convinced that there is no correlation between increased speculation and increased price volatility given the sheer volume of trades.
I can see the value of hedging and the importance of having contract if you are in the market as a producer or purchaser, but I am not so sure about the value of the speculator. Ultimately they don’t need to bring any value to the table so long as they don’t have any distortionary influence on the market, but I suspect that their participation is not as benign as they claim.
Unfortunately, because trading on the futures market has proven mildly addictive (probably another sign that it closely related to gambling!), I have been too caught up in my portfolio to answer to these more important social and moral questions…. but I’ll work on it!
This week I went long on corn, short on wheat and long on soybean oil. I’ll let the fickle numbers tell their own story, so far I am down, even with my accurate prediction that the FED would hold rates and not increase them as many anticipated. But things have a habit of turning around quite quickly so I am optimistic. Optimistic like any good gambler should be.
Happy Trading.
Harmony