Commodities have never been cheaper - time to buy?

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CULater
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Commodities have never been cheaper - time to buy?

Post by CULater » Sun Sep 09, 2018 7:01 am

Investor psychology is interesting, isn't it? Despite our intellectual understanding that it makes sense to buy the unloved and sell what everyone wants, we usually can't bring ourselves to do that. Commodities have been trashed over the last decade, while the U.S. stock market has been on a tear. Of course, we should have been backing up the truck on stocks in 2008 but who did that? Now might be the time to back up the truck on commodities, but who is doing that? (not me -- is it you?).

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Re: Commodities have never been cheaper - time to buy?

Post by bgf » Sun Sep 09, 2018 7:27 am

from what I've heard, it's a bit difficult to get pure exposure to broad commodities in the way you can with stocks. you deal with contango or something and other counterparty risks. ive looked into commodity ETFs before and it seems like they all have at least one major drawback.
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Re: Commodities have never been cheaper - time to buy?

Post by k66 » Sun Sep 09, 2018 9:44 am

There does seem to be a small group of ETFs that apparently track the S&P GSCI, but they aren't necessarily cheap ER-wise:

S&P GSCI Total Return Index – ETF Tracker

With the exception of BCI (0.29%), the rest have ERs between 0.5% and over 1%.
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Re: Commodities have never been cheaper - time to buy?

Post by nisiprius » Sun Sep 09, 2018 10:09 am

CULater wrote:
Sun Sep 09, 2018 7:01 am
...Despite our intellectual understanding that it makes sense to buy the unloved and sell what everyone wants...
I have no such "understanding."

What you have described is simply one of many active investing strategies, such as "growth at a reasonable price." This one is just "contrarian investing."

It is true that in order to score a speculative win by taking money away from other investors, it is necessary for you think something different from other investors. However, though necessary, it is not sufficient. Merely having a different opinion from other investors does not guarantee a win. It is also necessary for your opinion to be right and the market's opinion to be wrong.

In our local supermarket, packages of meat approaching their sell-by date go on sale as "manager's specials." Shoppers expect that they are wholesome, won't taste "off." They also expect that they won't last as long in the refrigerator, and probably won't taste quite as good, as the ones next to them that have not been marked down. They are marked down because they are "unloved." They are "unloved" because not as many people have a real use for them. They are still "loved" by people who are going to make meatloaf out of them tonight, "unloved" by people who are going to serve them as hamburgers to guests six days from now. It doesn't make sense to buy them just because they are "unloved." It only makes sense to buy them if you understand that the reasons for the markdown don't apply to you.

You can't make a profit by buying short-dated hamburger at "manager's special" prices and then reselling it at full price.

The oldest academic paper to discuss mean reversion that I know of (which doesn't mean much, I'm no expert) published in 1937: Cowles 3rd, Alfred E. and Herbert E. Jones (1937), "Some A Posteriori Probabilities in Stock Market Action". Econometrica 5 (3): 280–294. After demonstrating very convincingly that trends tended to persist for short periods of time like a few months, and "reverse" over periods of time on the order of five years, they spent several pages analyzing possible market timing systems to take advantage of the "reversals." They concluded that the reversal tendencies, though real, "could not be employed by speculators with any assurance of consistent or large profits."

Just because something is "unloved" by the market doesn't mean that the market is wrong. The market might be wrong, and, then again, the market might be right.
Last edited by nisiprius on Sun Sep 09, 2018 10:17 am, edited 6 times in total.
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Re: Commodities have never been cheaper - time to buy?

Post by market timer » Sun Sep 09, 2018 10:10 am

Yes, I like commodities now.

My portfolio looks something like this:

20% gold
15% crude oil (via long-dated futures)
15% emerging markets equities
10% non-US developed markets equities
25% long term bonds
15% cash

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Re: Commodities have never been cheaper - time to buy?

Post by nedsaid » Sun Sep 09, 2018 10:16 am

I do remember in Rick Ferri's book on asset allocation, he mentioned that commodities historically decline about 1% in real terms annually over long periods of time. So commodities do get cheaper over time.

If you wanted to invest in the futures, the question to ask would be whether markets you are interested in are in Backwardization or Contango.

I looked at the records of such funds at the Fidelity website, and the records are dismal. The commodities bull market ended back in 2008. I also believe the growth in the Chinese economy has slowed, perhaps dramatically, and this also is a big factor. Unlike stocks and bonds, commodities do not generate cash flow, hence I am wary.
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Re: Commodities have never been cheaper - time to buy?

Post by staythecourse » Sun Sep 09, 2018 10:27 am

If one is going to invest in commodities one needs to understand what they are investing with CCF.

There are 3 sources of return (spot price of commodity, roll return, and the margin). Spot price of commodities are basically inflation. Margin is the return of 30 day treasury usually. So both those returns are REAL return of expected zero. That means you are betting on roll return (backwardation).

So if one is a believer fine invest in it knowing you are adding a subasset class that will have low correlation to stocks and bonds but with LOW returns thus producing lower overall portfolio returns going forward. The greatness of the previous articles published by the Yale guys had roll returns similar to equity returns which is UNLIKELY to happen going forward. That is why the "holy grail of investing" as I call it is unlikely to happen which is every investors wish to add an asset class with equity like returns with low to no correlation to equities.

I do think commodities would be an interesting addition to a bond heavy investor. For them the expected return would be more similar of the 2 asset classes AND you get low to no correlation AND protection against unexpected inflation (the big advantage of commodities on paper).

Just some food for thought.

Good luck.
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Re: Commodities have never been cheaper - time to buy?

Post by lack_ey » Sun Sep 09, 2018 10:30 am

It's hard to understand commodities prices in terms of fundamentals. We're just looking at total returns over past periods, or relative to certain other assets (the latter in the graph shown).

I don't know that a low price really means we should expect higher forward returns. Haven't really looked at it for the commodities index returns series.

The bigger thing to me is just that historically, commodity returns have been relatively good in the latter stages of an economic cycle (as assessed over past cycles). Which may not be that predictive going forward. I don't know. It should really depend on how things unwind, and maybe all the large economies are not as sensitive to commodities as inputs these days.

I'm also not so happy seeing the contango/backwardation currently.

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Re: Commodities have never been cheaper - time to buy?

Post by grok87 » Sun Sep 09, 2018 11:15 am

more discussion in this thread

viewtopic.php?f=10&t=243986&start=50

personally i am waiting for the broad commodity index, bcom, to move into backwardation
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Re: Commodities have never been cheaper - time to buy?

Post by Day9 » Sun Sep 09, 2018 10:31 pm

The thing to do is add a splash of commodities while also increasing the duration of your bond portfolio. Commoidty and duration risk are complementary as one does well in unexpected inflation and the other in unexpected deflation. This lets you have a more efficient portfolio.
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Re: Commodities have never been cheaper - time to buy?

Post by sergeant » Sun Sep 09, 2018 10:44 pm

market timer wrote:
Sun Sep 09, 2018 10:10 am
Yes, I like commodities now.

My portfolio looks something like this:

20% gold
15% crude oil (via long-dated futures)
15% emerging markets equities
10% non-US developed markets equities
25% long term bonds
15% cash
How did your Tesla short go?
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Re: Commodities have never been cheaper - time to buy?

Post by WanderingDoc » Sun Sep 09, 2018 10:47 pm

market timer wrote:
Sun Sep 09, 2018 10:10 am
Yes, I like commodities now.

My portfolio looks something like this:

20% gold
15% crude oil (via long-dated futures)
15% emerging markets equities
10% non-US developed markets equities
25% long term bonds
15% cash
No real estate? Leveraged real estate pays you in 5 different ways and is a great inflation hedge. I believe even the current gov't posted inflation rate is the highest its been in 6 years. Gold pays you in 0 ways (maybe 1 way - capital appreciation, but not very much of it)
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Re: Commodities have never been cheaper - time to buy?

Post by CULater » Mon Sep 10, 2018 5:00 am

market timer wrote:
Sun Sep 09, 2018 10:10 am
Yes, I like commodities now.

My portfolio looks something like this:

20% gold
15% crude oil (via long-dated futures)
15% emerging markets equities
10% non-US developed markets equities
25% long term bonds
15% cash
Whooey! This the the Contrarian's Cocktail. Well Done!
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: Commodities have never been cheaper - time to buy?

Post by z3r0c00l » Mon Sep 10, 2018 6:23 am

What if they are cheaper because they are bad investments and there is a surplus that is growing despite a roaring US economy and middling international recovery?

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Re: Commodities have never been cheaper - time to buy?

Post by Valuethinker » Mon Sep 10, 2018 7:10 am

market timer wrote:
Sun Sep 09, 2018 10:10 am
Yes, I like commodities now.

My portfolio looks something like this:

20% gold
15% crude oil (via long-dated futures)
15% emerging markets equities
10% non-US developed markets equities
25% long term bonds
15% cash
To what extent is this shaped by the rest of your personal portfolio?

- you work in financial services in an area that would be affected by movements in the main market indices?

- private investments by you or your family, (if any)?

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Re: Commodities have never been cheaper - time to buy?

Post by Valuethinker » Mon Sep 10, 2018 7:14 am

z3r0c00l wrote:
Mon Sep 10, 2018 6:23 am
What if they are cheaper because they are bad investments and there is a surplus that is growing despite a roaring US economy and middling international recovery?
It's the long cycle. New investments in production of "hard" minerals takes 5-10 years (longer from discovery to production). Prices are low now because of overinvestment 5-15 years ago. It took the mining industry quite a while to "get religion" and scale back capex (ie they did not just simply stop doing capex after 2008-09).

China is such a huge fraction of incremental (and indeed absolute) demand for things like copper and iron ore, sea traded coal, that the position of its investment cycle is now critical.

Oil the marginal supply has become fracking which is much more price sensitive, but the big fields offshore etc still cost many billions and years to develop.

Agriculture the weather has generated some big shortages (most of the northern hemisphere was way above average temperature this year) however there are also areas that have had record harvests.

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Re: Commodities have never been cheaper - time to buy?

Post by Valuethinker » Mon Sep 10, 2018 7:16 am

CULater wrote:
Mon Sep 10, 2018 5:00 am
market timer wrote:
Sun Sep 09, 2018 10:10 am
Yes, I like commodities now.

My portfolio looks something like this:

20% gold
15% crude oil (via long-dated futures)
15% emerging markets equities
10% non-US developed markets equities
25% long term bonds
15% cash
Whooey! This the the Contrarian's Cocktail. Well Done!
Part of the issue may be job related. If one's employer is highly correlated with, say, US equities, then one is going to diversify one's stock portfolio.

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Re: Commodities have never been cheaper - time to buy?

Post by zaboomafoozarg » Mon Sep 10, 2018 8:46 am

Valuethinker wrote:
Mon Sep 10, 2018 7:16 am
CULater wrote:
Mon Sep 10, 2018 5:00 am
market timer wrote:
Sun Sep 09, 2018 10:10 am
Yes, I like commodities now.

My portfolio looks something like this:

20% gold
15% crude oil (via long-dated futures)
15% emerging markets equities
10% non-US developed markets equities
25% long term bonds
15% cash
Whooey! This the the Contrarian's Cocktail. Well Done!
Part of the issue may be job related. If one's employer is highly correlated with, say, US equities, then one is going to diversify one's stock portfolio.
If I recall correctly, he retired years ago at age 30ish after getting out of the -$200k "different approach to asset allocation" hole and saving up about $1M.

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Re: Commodities have never been cheaper - time to buy?

Post by market timer » Mon Sep 10, 2018 9:51 am

sergeant wrote:
Sun Sep 09, 2018 10:44 pm
How did your Tesla short go?
Still short the Dec 350 calls. They've lost over 80% of their value, so a nice gain so far. I expect to hold until they expire worthless. This is a small wager, contributing 0.3% to my portfolio, enough for a nice vacation.

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Re: Commodities have never been cheaper - time to buy?

Post by market timer » Mon Sep 10, 2018 9:55 am

WanderingDoc wrote:
Sun Sep 09, 2018 10:47 pm
No real estate? Leveraged real estate pays you in 5 different ways and is a great inflation hedge. I believe even the current gov't posted inflation rate is the highest its been in 6 years. Gold pays you in 0 ways (maybe 1 way - capital appreciation, but not very much of it)
I love real estate as an asset class, but am currently too lazy to manage it. In fact, I own real estate with my wife that sits vacant.

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Re: Commodities have never been cheaper - time to buy?

Post by market timer » Mon Sep 10, 2018 10:04 am

Valuethinker wrote:
Mon Sep 10, 2018 7:10 am
To what extent is this shaped by the rest of your personal portfolio?

- you work in financial services in an area that would be affected by movements in the main market indices?

- private investments by you or your family, (if any)?
Yes, both of those play a significant role in my allocation decision. Perhaps more important is not requiring an investment return to fund retirement. I'm comfortable holding low yielding assets and waiting for future opportunities.

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Re: Commodities have never been cheaper - time to buy?

Post by market timer » Mon Sep 10, 2018 10:14 am

zaboomafoozarg wrote:
Mon Sep 10, 2018 8:46 am
If I recall correctly, he retired years ago at age 30ish after getting out of the -$200k "different approach to asset allocation" hole and saving up about $1M.
Valuethinker is right. I'm back at work and enjoying the booming economy, now close to the second million.

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Re: Commodities have never been cheaper - time to buy?

Post by unclescrooge » Mon Sep 10, 2018 10:30 am

market timer wrote:
Mon Sep 10, 2018 10:14 am
zaboomafoozarg wrote:
Mon Sep 10, 2018 8:46 am
If I recall correctly, he retired years ago at age 30ish after getting out of the -$200k "different approach to asset allocation" hole and saving up about $1M.
Valuethinker is right. I'm back at work and enjoying the booming economy, now close to the second million.
Well done!
That's quite the recovery... And kudos on the Tesla short. I didn't have the courage to short it even though I agreed with everything you said at the time.

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Re: Commodities have never been cheaper - time to buy?

Post by JBTX » Mon Sep 10, 2018 11:43 am

I have some money in this fund

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

and a smattering of gold, silver, natural resource fund, plus REITS. All that compromises not quite 10% of my portfolio.

I got into the fund above because of the theoretical diversification benefits of commodities. I still have it, but the more I have learned on commodities makes me pause

- Historical long term returns tend to be approximately inflation, or a tad lower when including expenses
- It is hard to get the returns of a spot index. Either you have
----- Risk of contango significant diminishing returns of futures tracking
----- Relying on some sort of derivative that may track better than futures (less a fee) but does carry the liquidity risk of the underlying firm writing the derivative
- generally high expenses

I still think there is some value in it, but I tend to tread lightly. If I could more cleanly invest in a broad basket spot index without contango or issue risk and with low fees, I would probably invest more.

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Re: Commodities have never been cheaper - time to buy?

Post by nedsaid » Mon Sep 10, 2018 12:12 pm

Day9 wrote:
Sun Sep 09, 2018 10:31 pm
The thing to do is add a splash of commodities while also increasing the duration of your bond portfolio. Commoidty and duration risk are complementary as one does well in unexpected inflation and the other in unexpected deflation. This lets you have a more efficient portfolio.
This is something Larry Swedroe has discussed for years here on this thread. It seems to me that you also want to check the steepness of the yield curve. Right now, the yield curve of Treasuries looks relatively flat here. One month as of 9/7/2018 is 1.98%, 6 month is 2.30%, one year is 2.53%, three year is 2.78%, five year is 2.82%, ten year is 2.94% and thirty year is 3.11%. Not sure I would do the commodities plus increased duration strategy right now. Not a huge difference between five year and thirty year yields.
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Re: Commodities have never been cheaper - time to buy?

Post by boglerdude » Tue Sep 11, 2018 2:33 am

Investment banks warehoused/hoarded commodities, can they do that again?

https://foreignpolicy.com/2011/04/27/ho ... od-crisis/

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Re: Commodities have never been cheaper - time to buy?

Post by moneywise3 » Tue Sep 11, 2018 2:47 am

With your fun money, go ahead. No more than 5% is recommended.

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Re: Commodities have never been cheaper - time to buy?

Post by Valuethinker » Tue Sep 11, 2018 3:16 am

boglerdude wrote:
Tue Sep 11, 2018 2:33 am
Investment banks warehoused/hoarded commodities, can they do that again?

https://foreignpolicy.com/2011/04/27/ho ... od-crisis/
I am no expert on the legal proceedings, what the banks are alleged to have done, what they did do.

However I doubt they can do it again. Too much scrutiny and legal risk.

The place to worry about is China. Because Chinese investors bought up lots of commodities as an exchange rate hedge (if the currency were to be devalued) and for other reasons.

I presume that has been unwound. But China is the swing consumer of so many commodities, and such a large and volatile fraction of commodity demand, that they move markets. And China looks to have created the largest debt/ property bubble in recorded history-- bigger even than the US 2006 bubble.

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Re: Commodities have never been cheaper - time to buy?

Post by CULater » Tue Sep 11, 2018 2:17 pm

Investors looking at U.S. stocks at current valuation levels and bonds with rising interest rates are asking: "can I buy anything else?" Maybe commodities or old yellow? T-Bills might not be a bad idea either.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: Commodities have never been cheaper - time to buy?

Post by Valuethinker » Wed Sep 12, 2018 2:58 am

CULater wrote:
Tue Sep 11, 2018 2:17 pm
Investors looking at U.S. stocks at current valuation levels and bonds with rising interest rates are asking: "can I buy anything else?" Maybe commodities or old yellow? T-Bills might not be a bad idea either.
Those are at opposite ends of the risk spectrum, so they are not close substitutes.

The Bitcoin bubble has made a case for gold - people are distracted by the shiny new bauble, and ignore the steady old one. Not that gold investing is low risk or high return, of course-- your expected long run return is less than zero (cost of the metal less storage costs).

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Re: Commodities have never been cheaper - time to buy?

Post by grok87 » Wed Sep 12, 2018 7:14 am

Valuethinker wrote:
Wed Sep 12, 2018 2:58 am
CULater wrote:
Tue Sep 11, 2018 2:17 pm
Investors looking at U.S. stocks at current valuation levels and bonds with rising interest rates are asking: "can I buy anything else?" Maybe commodities or old yellow? T-Bills might not be a bad idea either.
Those are at opposite ends of the risk spectrum, so they are not close substitutes.

The Bitcoin bubble has made a case for gold - people are distracted by the shiny new bauble, and ignore the steady old one. Not that gold investing is low risk or high return, of course-- your expected long run return is less than zero (cost of the metal less storage costs).
Agree. Presumably you mean long run REAL return is less than zero.

That’s why I don’t invest in gold. I only want to invest in things that have a positive expected real return.

I know that some folks do it for the correlation benefit- ie the permanent portfolio etc. my view is that the correlations are uncertain and changing. Investment is not physics. It’s not a bad idea to pick things that you expect might be less correlated: stocks, real estate, nominal bonds, tips. But i’m Not hanging my hat on that. Still want an expected positive real return from everything I own and if the correlations come through as expected that would be a bonus.
Keep calm and Boglehead on. KCBO.

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Re: Commodities have never been cheaper - time to buy?

Post by Valuethinker » Wed Sep 12, 2018 7:36 am

grok87 wrote:
Wed Sep 12, 2018 7:14 am
Valuethinker wrote:
Wed Sep 12, 2018 2:58 am
CULater wrote:
Tue Sep 11, 2018 2:17 pm
Investors looking at U.S. stocks at current valuation levels and bonds with rising interest rates are asking: "can I buy anything else?" Maybe commodities or old yellow? T-Bills might not be a bad idea either.
Those are at opposite ends of the risk spectrum, so they are not close substitutes.

The Bitcoin bubble has made a case for gold - people are distracted by the shiny new bauble, and ignore the steady old one. Not that gold investing is low risk or high return, of course-- your expected long run return is less than zero (cost of the metal less storage costs).
Agree. Presumably you mean long run REAL return is less than zero.

That’s why I don’t invest in gold. I only want to invest in things that have a positive expected real return.

I know that some folks do it for the correlation benefit- ie the permanent portfolio etc. my view is that the correlations are uncertain and changing. Investment is not physics. It’s not a bad idea to pick things that you expect might be less correlated: stocks, real estate, nominal bonds, tips. But i’m Not hanging my hat on that. Still want an expected positive real return from everything I own and if the correlations come through as expected that would be a bonus.
That I think is the argument for gold.

That the long run expected (real) return is indeed negative.

Thus you have to have some reward for it - and the anticorrelation is the reward. Unfortunately in more recent times it seems to have been performing as a high beta stock?

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Re: Commodities have never been cheaper - time to buy?

Post by Dudley » Thu Sep 13, 2018 6:19 am

market timer wrote:
Sun Sep 09, 2018 10:10 am
Yes, I like commodities now.

My portfolio looks something like this:

20% gold
15% crude oil (via long-dated futures)
15% emerging markets equities
10% non-US developed markets equities
25% long term bonds
15% cash
I really admire and respect this guy : smart, conviction, courage and man does he have balls of brass. I look forward to seeing how this portfolio unfolds over the coming years. It could be another epic and hopefully in a good direction for him.

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Re: Commodities have never been cheaper - time to buy?

Post by B4Xt3r » Thu Sep 13, 2018 6:39 am

nisiprius wrote:
Sun Sep 09, 2018 10:09 am
CULater wrote:
Sun Sep 09, 2018 7:01 am
...Despite our intellectual understanding that it makes sense to buy the unloved and sell what everyone wants...
I have no such "understanding."

What you have described is simply one of many active investing strategies, such as "growth at a reasonable price." This one is just "contrarian investing."

It is true that in order to score a speculative win by taking money away from other investors, it is necessary for you think something different from other investors. However, though necessary, it is not sufficient. Merely having a different opinion from other investors does not guarantee a win. It is also necessary for your opinion to be right and the market's opinion to be wrong.

In our local supermarket, packages of meat approaching their sell-by date go on sale as "manager's specials." Shoppers expect that they are wholesome, won't taste "off." They also expect that they won't last as long in the refrigerator, and probably won't taste quite as good, as the ones next to them that have not been marked down. They are marked down because they are "unloved." They are "unloved" because not as many people have a real use for them. They are still "loved" by people who are going to make meatloaf out of them tonight, "unloved" by people who are going to serve them as hamburgers to guests six days from now. It doesn't make sense to buy them just because they are "unloved." It only makes sense to buy them if you understand that the reasons for the markdown don't apply to you.

You can't make a profit by buying short-dated hamburger at "manager's special" prices and then reselling it at full price.

The oldest academic paper to discuss mean reversion that I know of (which doesn't mean much, I'm no expert) published in 1937: Cowles 3rd, Alfred E. and Herbert E. Jones (1937), "Some A Posteriori Probabilities in Stock Market Action". Econometrica 5 (3): 280–294. After demonstrating very convincingly that trends tended to persist for short periods of time like a few months, and "reverse" over periods of time on the order of five years, they spent several pages analyzing possible market timing systems to take advantage of the "reversals." They concluded that the reversal tendencies, though real, "could not be employed by speculators with any assurance of consistent or large profits."

Just because something is "unloved" by the market doesn't mean that the market is wrong. The market might be wrong, and, then again, the market might be right.
+1. This post needs more attention.

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Re: Commodities have never been cheaper - time to buy?

Post by asif408 » Thu Sep 13, 2018 7:42 am

I have about 20% of my portfolio in funds invested in the stocks of commodities producers. I was persuaded by the writings of Bill Bernstein and GMO regarding commodities that if I was going to invest in commodities to avoid commodities futures and stick with commodity producing companies, as backwardation/contango are not predictable and can only be observed after the fact. Investing in commodity futures while in contango would potentially destroy any benefit of holding them.

My reasons for holding them are as a short term inflation hedge (if inflation were to rise quickly, they could potentially keep up better than my total market funds) and the fact that they've performed so poorly for the last 6-7 years while the overall US market has gone up.

grok87
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Re: Commodities have never been cheaper - time to buy?

Post by grok87 » Thu Sep 13, 2018 7:46 am

asif408 wrote:
Thu Sep 13, 2018 7:42 am
I have about 20% of my portfolio in funds invested in the stocks of commodities producers. I was persuaded by the writings of Bill Bernstein and GMO regarding commodities that if I was going to invest in commodities to avoid commodities futures and stick with commodity producing companies, as backwardation/contango are not predictable and can only be observed after the fact. Investing in commodity futures while in contango would potentially destroy any benefit of holding them.

My reasons for holding them are as a short term inflation hedge (if inflation were to rise quickly, they could potentially keep up better than my total market funds) and the fact that they've performed so poorly for the last 6-7 years while the overall US market has gone up.
I’d be careful with that last argument. There is no reason to expect stock sectors to mean revert. Still waiting for the recovery in the stocks of buggy whip manufacturers...
:)
Keep calm and Boglehead on. KCBO.

grok87
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Re: Commodities have never been cheaper - time to buy?

Post by grok87 » Thu Sep 13, 2018 7:47 am

Valuethinker wrote:
Wed Sep 12, 2018 7:36 am
grok87 wrote:
Wed Sep 12, 2018 7:14 am
Valuethinker wrote:
Wed Sep 12, 2018 2:58 am
CULater wrote:
Tue Sep 11, 2018 2:17 pm
Investors looking at U.S. stocks at current valuation levels and bonds with rising interest rates are asking: "can I buy anything else?" Maybe commodities or old yellow? T-Bills might not be a bad idea either.
Those are at opposite ends of the risk spectrum, so they are not close substitutes.

The Bitcoin bubble has made a case for gold - people are distracted by the shiny new bauble, and ignore the steady old one. Not that gold investing is low risk or high return, of course-- your expected long run return is less than zero (cost of the metal less storage costs).
Agree. Presumably you mean long run REAL return is less than zero.

That’s why I don’t invest in gold. I only want to invest in things that have a positive expected real return.

I know that some folks do it for the correlation benefit- ie the permanent portfolio etc. my view is that the correlations are uncertain and changing. Investment is not physics. It’s not a bad idea to pick things that you expect might be less correlated: stocks, real estate, nominal bonds, tips. But i’m Not hanging my hat on that. Still want an expected positive real return from everything I own and if the correlations come through as expected that would be a bonus.
That I think is the argument for gold.

That the long run expected (real) return is indeed negative.

Thus you have to have some reward for it - and the anticorrelation is the reward. Unfortunately in more recent times it seems to have been performing as a high beta stock?
Exactly. The correlations are unknowable
Keep calm and Boglehead on. KCBO.

Jack FFR1846
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Re: Commodities have never been cheaper - time to buy?

Post by Jack FFR1846 » Thu Sep 13, 2018 7:59 am

grok87 wrote:
Thu Sep 13, 2018 7:46 am
There is no reason to expect stock sectors to mean revert. Still waiting for the recovery in the stocks of buggy whip manufacturers...
:)
The whip manufacturers are mostly private. Coming from "the Whip City", I can tell you that although the industry has become much smaller, it's still going.

https://en.wikipedia.org/wiki/Westfield ... ng_Company
Bogle: Smart Beta is stupid

asif408
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Re: Commodities have never been cheaper - time to buy?

Post by asif408 » Thu Sep 13, 2018 8:33 am

grok87 wrote:
Thu Sep 13, 2018 7:46 am
asif408 wrote:
Thu Sep 13, 2018 7:42 am
I have about 20% of my portfolio in funds invested in the stocks of commodities producers. I was persuaded by the writings of Bill Bernstein and GMO regarding commodities that if I was going to invest in commodities to avoid commodities futures and stick with commodity producing companies, as backwardation/contango are not predictable and can only be observed after the fact. Investing in commodity futures while in contango would potentially destroy any benefit of holding them.

My reasons for holding them are as a short term inflation hedge (if inflation were to rise quickly, they could potentially keep up better than my total market funds) and the fact that they've performed so poorly for the last 6-7 years while the overall US market has gone up.
I’d be careful with that last argument. There is no reason to expect stock sectors to mean revert. Still waiting for the recovery in the stocks of buggy whip manufacturers...
:)
True, but I'm ok with that risk.

JBTX
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Re: Commodities have never been cheaper - time to buy?

Post by JBTX » Thu Sep 13, 2018 2:57 pm

asif408 wrote:
Thu Sep 13, 2018 7:42 am
I have about 20% of my portfolio in funds invested in the stocks of commodities producers. I was persuaded by the writings of Bill Bernstein and GMO regarding commodities that if I was going to invest in commodities to avoid commodities futures and stick with commodity producing companies, as backwardation/contango are not predictable and can only be observed after the fact. Investing in commodity futures while in contango would potentially destroy any benefit of holding them.

My reasons for holding them are as a short term inflation hedge (if inflation were to rise quickly, they could potentially keep up better than my total market funds) and the fact that they've performed so poorly for the last 6-7 years while the overall US market has gone up.
While in theory this makes sense, some commodities, such as gold, have become terribly run companies. The market should adjust price to reflect that, but gold mining stocks often have valuations based partially on their reserves, and not as much on their cash-flows/profits.

Of course, the above is not at all true for resource companies such as oil or large agriculture.

https://www.forbes.com/sites/nathanvard ... 2de9155115

Valuethinker
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Re: Commodities have never been cheaper - time to buy?

Post by Valuethinker » Fri Sep 14, 2018 5:24 am

JBTX wrote:
Thu Sep 13, 2018 2:57 pm
asif408 wrote:
Thu Sep 13, 2018 7:42 am
I have about 20% of my portfolio in funds invested in the stocks of commodities producers. I was persuaded by the writings of Bill Bernstein and GMO regarding commodities that if I was going to invest in commodities to avoid commodities futures and stick with commodity producing companies, as backwardation/contango are not predictable and can only be observed after the fact. Investing in commodity futures while in contango would potentially destroy any benefit of holding them.

My reasons for holding them are as a short term inflation hedge (if inflation were to rise quickly, they could potentially keep up better than my total market funds) and the fact that they've performed so poorly for the last 6-7 years while the overall US market has gone up.
While in theory this makes sense, some commodities, such as gold, have become terribly run companies. The market should adjust price to reflect that, but gold mining stocks often have valuations based partially on their reserves, and not as much on their cash-flows/profits.

Of course, the above is not at all true for resource companies such as oil or large agriculture.

https://www.forbes.com/sites/nathanvard ... 2de9155115
The problem with valuing by reserves is:

- to get to cash flow you need 1. a forecast of future production volume 2. a forecast of future cost of production 3. a forecast of future price

At least in theory then the share prices should be highly sensitive to future forecasts of price (which are probably not observable?) and also to your discount rate (which empirically seems to be quite volatile).

There are analogies to the way Oil Exploration and Production companies (as opposed to vertically integrated "big Oil" cos) are valued e.g. price per barrel proved and probable reserves. At least before fracking changed the whole question of what is an extractible reserve-- making oil companies more like mining companies (or even forestry companies).

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nedsaid
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Re: Commodities have never been cheaper - time to buy?

Post by nedsaid » Fri Sep 14, 2018 8:10 am

nisiprius wrote:
Sun Sep 09, 2018 10:09 am
CULater wrote:
Sun Sep 09, 2018 7:01 am
...Despite our intellectual understanding that it makes sense to buy the unloved and sell what everyone wants...
I have no such "understanding."

What you have described is simply one of many active investing strategies, such as "growth at a reasonable price." This one is just "contrarian investing."

It is true that in order to score a speculative win by taking money away from other investors, it is necessary for you think something different from other investors. However, though necessary, it is not sufficient. Merely having a different opinion from other investors does not guarantee a win. It is also necessary for your opinion to be right and the market's opinion to be wrong.

In our local supermarket, packages of meat approaching their sell-by date go on sale as "manager's specials." Shoppers expect that they are wholesome, won't taste "off." They also expect that they won't last as long in the refrigerator, and probably won't taste quite as good, as the ones next to them that have not been marked down. They are marked down because they are "unloved." They are "unloved" because not as many people have a real use for them. They are still "loved" by people who are going to make meatloaf out of them tonight, "unloved" by people who are going to serve them as hamburgers to guests six days from now. It doesn't make sense to buy them just because they are "unloved." It only makes sense to buy them if you understand that the reasons for the markdown don't apply to you.

You can't make a profit by buying short-dated hamburger at "manager's special" prices and then reselling it at full price.

The oldest academic paper to discuss mean reversion that I know of (which doesn't mean much, I'm no expert) published in 1937: Cowles 3rd, Alfred E. and Herbert E. Jones (1937), "Some A Posteriori Probabilities in Stock Market Action". Econometrica 5 (3): 280–294. After demonstrating very convincingly that trends tended to persist for short periods of time like a few months, and "reverse" over periods of time on the order of five years, they spent several pages analyzing possible market timing systems to take advantage of the "reversals." They concluded that the reversal tendencies, though real, "could not be employed by speculators with any assurance of consistent or large profits."

Just because something is "unloved" by the market doesn't mean that the market is wrong. The market might be wrong, and, then again, the market might be right.
A few thoughts here. First, there is a big difference between stocks and commodities. Stocks generate cash flows and commodities do not. Second, Value is a discipline. You may not always be able to buy bargains but at least you can avoid the performance chasing behavior that plagues many investors. It is interesting that for stocks, Value seems to work best in combination with momentum and quality. Deep Value is correlated with negative momentum. Setting momentum to neutral and taking into consideration Quality helps screen out the "Value traps." So really, comments about Value when applied to commodities don't really apply as commodities do not generate cash flow. You could however check current commodity prices with historical trends, cost of production, and look at where we are in the economic cycle. Momentum is a factor with commodities. But certainly you don't apply the same tests for Value to commodities as you would for stocks. Hard enough to determine if certain stocks are cheap, even harder for commodities. Another difference is that stocks historically have generated positive real returns after inflation whereas commodities get cheaper in real terms over time.
A fool and his money are good for business.

JBTX
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Re: Commodities have never been cheaper - time to buy?

Post by JBTX » Fri Sep 14, 2018 11:48 am

Seems to me that commodities would be best looked at as an inflation hedge vs a growth investment (and a volatile and imperfect hedge). The spot price is simply a price of a material, and one would expect that all else equal, they are subject to the same inflation as other goods. Of course, technology extraction and production techniques can certainly decrease their price, and limited supply issues or growing demand issues could increase their price - which to the extent factor into inflation of almost anything.

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