Ben Carlson on Commodities

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analogsavior
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Ben Carlson on Commodities

Post by analogsavior » Mon Jul 24, 2017 3:29 pm

I stumbled upon this opinion piece by Ben Carlson (author of A Wealth of Common Sense) about commodities and their role in the long term investor's portfolio.

https://www.bloomberg.com/view/articles ... -investors

Some key points from the article include:
- The ease of investing in commodities since the early 90's has made it more difficult to extract profits
- As it became easier to invest in commodities, more and more investors piled in, likely exacerbating the volatility in recent years
- There is no financial reason that commodities must exhibit mean reversion
- Commodities have shown lower returns than cash, higher volatility than stocks, and higher correlation with stocks than cash since 1991 (formation of Bloomberg Commodities Index)
- While not good for long term buy and hold investor, they do at times represent good trading opportunities given their boom/bust cyclical nature

I also found this particular quote interesting:
Commodities are more of an input than a financial asset. In many ways, a bet for commodities is a bet against technology and innovation.
I've never given much thought to commodities as I run (essentially) a 3 fund portfolio. I'm curious if anyone else has thoughts on Ben Carlson's points, especially those who currently, or in the past, have invested in commodities.

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nisiprius
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Re: Ben Carlson on Commodities

Post by nisiprius » Mon Jul 24, 2017 4:05 pm

My reaction is irritation with what I will call "the financial advice community in general." I shouldn't criticize Ben Carlson, because I don't know what he's said about commodities in the past, but from perhaps 2006 to 2013-14 or so, there really was a broad consensus that your ordinary retirement investor "needed" commodities in his portfolio--a broad enough consensus that at one point Fidelity was using a 10% commodities allocation in their mainline target retirement funds.

I resisted the commodities fad, but I have to say that people were pushing it pretty hard as a sure thing, and my reaction to articles saying "funny thing, it stopped working at just about the time that people got into it" is "so, now they tell us?" It's kind of like reading an article in 1932 that says "don't invest in stocks."

So, OK I guess, but I recommend William J. Bernstein's Skating Where the Puck Was, which came out in 2012.

This is a chart of the PIMCO Commodity Real Return Strategy Fund, one that was widely praised and recommended in the past:
Source

Image

Now, one sort of murkiness is failure to distinguish between commodities themselves, which are the things you need to be prepared to take delivery of, and commodities futures, which is what all of the easily-accessed funds and ETFs invest in. I think. I don't do it myself so I don't understand it too well. You will notice that Carlson says exactly nothing about this, and I'm not knowledgeable enough to know which of them he's talking about, or which the Goldman Sachs Commodities Index and the Bloomberg Commodities Index are indexing. Quick Google search: "The Bloomberg index is made up of 22 exchange-traded futures on physical commodities." Well, if we are talking about futures, then it might be a little facile to say "They provide no dividends or income. They don’t have earnings." That's a fair statement about commodities themselves, but commodities futures have "roll return" and they have interest on collateral. I think I remember someone saying something like that, anyway. So, it's not that they "don't have earnings," it's that they (probably) do but the risk-return relation isn't as good as for boring old traditional securities.

Anyway, the commodities thing seems to have been a fad which has come and gone, which didn't do investors much good--didn't do them much harm either, but mostly did good for the purveyors of commodity funds and ETFs.
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afan
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Re: Ben Carlson on Commodities

Post by afan » Mon Jul 24, 2017 5:15 pm

You know, I was thinking today that Bogleheads has been much better lately.
For too long there were people who were constantly selling, the only word I can use for it, the latest greatest investment idea. Collateralized commodities futures funds were one of those great ideas. Then, for a while, it was smart beta. Then it was funds that would rotate among whatever factors they thought would be hot in the short term.
Some people reading the forum took all this seriously, or so they claimed. They got upset when funds closed or had high minimum purchases. They fretted about not having enough devoted to the left-handed-deputy-chief-financial-officer factor. They seemed to pile on every hot new marketing ploy.

It was kind of depressing.

More recently, perhaps having learned from all the nonsense described above, people seem more willing to accept that the market is efficient and they don't need to pay someone 1% of assets to put them in high priced funds that have glossy brochures but no good reason to think they will beat the market on a risk adjusted basis. I don't know whether the people pushing these extreme investment approaches have given up and moved on to some other site where they get a better reception, lost their money in these gambles or actually realized this was a losing game.

I remember those commodity threads. Glad they have faded into oblivion.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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David Jay
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Re: Ben Carlson on Commodities

Post by David Jay » Mon Jul 24, 2017 5:20 pm

I like the way Buffett puts it:

"The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn't going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time."
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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nedsaid
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Re: Ben Carlson on Commodities

Post by nedsaid » Mon Jul 24, 2017 5:32 pm

There is a certain snob appeal to having more complicated portfolios with more asset classes. I know that I would like to be on the cutting edge, in the know, up to date, forward thinking. But somehow, the old tried and true of stock and bond diversification seems to do about as good and sometimes better.

I am a bit of an asset class collector myself. I bought TIPS and REIT funds at my favorite mutual fund company almost as soon as they became available. I bought International Bonds about the mid-2000's before they became popular. About 2007, I started with Small/Value tilting. You might say that I am an early adopter.

I never bought into commodities and the PIMCO fund discussed above was available at my workplace savings plan. I did not bite. Somehow, the low returns from the fund made in unappealing to me. I also was tempted by Precious Metals funds, even when they were doing well, it seemed my plain old boring stock mutual funds were performing even better. Again, this was a case of very low returns over long periods of time with higher volatility.

TIPS produce about the same returns as nominal bonds, after all, they are bonds. REITs produce about the same returns as the rest of the stock market. Because their returns were in line with their broad asset class, these were more appealing. Very similar rationale for Small Value and for Large Value, except they are supposed to outperform, maybe.

Bottom line, Commodities and Precious Metals Funds were the worst of both worlds, low returns and high volatility. Even though there is low correlation with the US Stock Market, you could say that money stashed in the mattress might have even better diversification benefit as there is zero correlation with the market, zero return, and zero volatility. I want good returns along with low correlation to the stock market.
A fool and his money are good for business.

Swelfie
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Re: Ben Carlson on Commodities

Post by Swelfie » Mon Jul 24, 2017 5:37 pm

I agree with him but I think there is more to the story.

Investing in a commodities index directly I think intuitively returns inflation with a whole lot of volatility mixed in. I'd rather use TIPS.

But, I do believe that investing in commodity futures with mean reversion in mind, positive momentum (managed futures) and a positive expected roll return boosts the expected rate of return while still giving the inflationary returns and with a lower market correlation. For this reason I do have small positions in WDTI and RCOM as alternatives (I will likely use FUT instead of WDTI going forward as it just seems to be capturing the momentum premium better.)

This is only about 5% of my portfolio, however, because my faith in this assumption is weak. And it sure hasn't been doing well recently.

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Re: Ben Carlson on Commodities

Post by jalbert » Mon Jul 24, 2017 11:01 pm

Trying to truly understand the impact of contango or backwardation on an investment in commodities will make most folks' heads spin. (For instance, they are stochastic, not deterministic concepts). Applying the maxim of not investing in something one doesn't understand will keep a 5% stake in commodities out of many portfolios-- certainly mine.
Risk is not a guarantor of return.

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Sammy_M
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Re: Ben Carlson on Commodities

Post by Sammy_M » Tue Jul 25, 2017 5:48 am

I suspect the lack of interest in commodity/CCF funds and precious metals/PME is driven by the economic climate we have today with little inflation and recent strong returns from equities. The tide will turn one day.

afan
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Re: Ben Carlson on Commodities

Post by afan » Tue Jul 25, 2017 9:26 am

https://faculty.fuqua.duke.edu/~charvey ... 4_2017.pdf

Anything Campbell Harvey writes is worth reading. People who market CCF funds just hope not enough people read his work to realize they don't want what the funds are selling.

https://faculty.fuqua.duke.edu/~charvey ... _about.pdf
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

grok87
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Re: Ben Carlson on Commodities

Post by grok87 » Tue Jul 25, 2017 11:45 am

Does anyone know if there is a commodity fund or etf that is "backwardation" focused?

There used to be an etn by credit suisse ticker CSCR but it got called early due to lack of interest.
Keep calm and Boglehead on. KCBO.

Valuethinker
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Re: Ben Carlson on Commodities

Post by Valuethinker » Tue Jul 25, 2017 11:49 am

afan wrote:You know, I was thinking today that Bogleheads has been much better lately.
For too long there were people who were constantly selling, the only word I can use for it, the latest greatest investment idea. Collateralized commodities futures funds were one of those great ideas. Then, for a while, it was smart beta. Then it was funds that would rotate among whatever factors they thought would be hot in the short term.
Some people reading the forum took all this seriously, or so they claimed. They got upset when funds closed or had high minimum purchases. They fretted about not having enough devoted to the left-handed-deputy-chief-financial-officer factor. They seemed to pile on every hot new marketing ploy.

It was kind of depressing.

More recently, perhaps having learned from all the nonsense described above, people seem more willing to accept that the market is efficient and they don't need to pay someone 1% of assets to put them in high priced funds that have glossy brochures but no good reason to think they will beat the market on a risk adjusted basis. I don't know whether the people pushing these extreme investment approaches have given up and moved on to some other site where they get a better reception, lost their money in these gambles or actually realized this was a losing game.

I remember those commodity threads. Glad they have faded into oblivion.
Bitcoin my friend. Crypto currencies. Cyber. That's the future.

See some recent threads on same-- one poster argued Bitcoin was less volatile than most investments such as stocks.

Crypto, young man. Crypto ;-).

Valuethinker
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Re: Ben Carlson on Commodities

Post by Valuethinker » Tue Jul 25, 2017 11:50 am

Sammy_M wrote:I suspect the lack of interest in commodity/CCF funds and precious metals/PME is driven by the economic climate we have today with little inflation and recent strong returns from equities. The tide will turn one day.
or rather, that commodities have been going the wrong way.

This forum, perhaps like all investing forums, attracts a lot of attention to recent price momentum.

For example, international stocks have been negatively viewed for quite some time. However, in the last few months, we have seen more questions about them-- I believe in USD terms they are doing better.

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Re: Ben Carlson on Commodities

Post by Valuethinker » Tue Jul 25, 2017 11:54 am

afan wrote:https://faculty.fuqua.duke.edu/~charvey ... 4_2017.pdf

Anything Campbell Harvey writes is worth reading. People who market CCF funds just hope not enough people read his work to realize they don't want what the funds are selling.

https://faculty.fuqua.duke.edu/~charvey ... _about.pdf
I wanted to thank you for that paper from Duke.

I knew Cam Harvey had some connection to the Toronto establishment, and I never knew what that was (his grandfather was a publisher of the largest newspaper, The Toronto Star). Now I do.

He ran quite hard for President of the U of Toronto Students Council. There were election irregularities, and he lost (polls held open late at the Catholic college, he attended the (smaller) Anglican college). Had he won, he might have gone on in politics and perhaps been a Cabinet Minister or Prime Minister some day (we certainly thought he had the inclination and potential).

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