<DrumBeat: September 26, 2006 The Oil Drum DrumBeat: September 27, 2006>

169 comments on Natural Gas - A Tale of Two Markets

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MicroHydro on September 27, 2006 - 5:22am Permalink | Subthread | Parent | Comments top
Speaking of gambling, as a peak energy warrior on the NYMEX, this speculator got a small bruising.  However, I only took a 8% reduction in my 2006 profits, atill on track to be an excellent year.  Compare this to Amaranth, which lost over 50% of their portfolio in 11 trading days by gambling on the March 2007/April 2007 contract spread.

Amaranth is a god study in how to lose (other people's) money quickly. (The twenty-something Calgary based Amaranth trader was gambling with other people's pension funds and such.) As I am less leveraged, and speculating in far future contracts, my (percentage) losses were much more manageable.  Commodity trading risk can be reduced by controlling one's greed and mastering one's fears.

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Jack on September 27, 2006 - 6:28am Permalink | Subthread | Parent | Comments top
The Amaranath trader was 30-something, but you are basically right. The compensation structure of hedge funds encourages massive risk taking. I expect it will be reevaluated.

These guys roll the dice (with other people's money)and if they win they get rich. If they lose, they may need to find a new job (although after his $50mn payment last year, that may not be so urgent for the Amaranth guy).

Actually, technically, in finance the term risk applies equally to upside and downside - it is essentially volitility (or deviation from expected result). Your claim is that you can limit exposure to downside risk, while maintaining exposure to upside risk. I won't argue that it is not possible, but it is not an investment strategy for everyone.

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MicroHydro on September 27, 2006 - 6:39am Permalink | Subthread | Parent | Comments top
Definitely NOT for everyone.  I advise most people to buy and hold real stuff without leverage or debt using dollar cost averaging.  Whether bars of silver or a tank of LPG in the backyard or a farmette by the creek - real stuff owned outright is good.  Commodity trading requires attention to technical matters, fundamentals, and sangfroid - not for the timid or adrenalin junkies either.  It should also only be done with money one can afford to lose.  However, a good technician can pick entry and exit points where the downside risk is less than the upside.
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Jack on September 27, 2006 - 7:46am Permalink | Subthread | Parent | Comments top
Agreed. Good point about being able to afford to lose the money. That doesn't apply only to commodities but to any risk bearing investment.

Any money that you are going to need to spend should be in a fairly safe investment class such as bonds or cash equiv.

It's OK to take risks with a portion of your equity, or if you are young and have time to earn it back.

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169 comments on Natural Gas - A Tale of Two Markets

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