trading/investing in commodities - why do/have people prefer equities?

[john kane]

Just wondering why so many people go for equities? The recent last few years for commodities seems to of been great, why have so many not taken advantage?

Copper has shooted back up in the last couple of weeks from 6200 or so to 7400, nickel has now almost hit 50,000, gold is starting to rise again, uranium has gone through the roof.

Why isn't/didn't everyone make trades/investments in these?

Is it a case of high risk - high return and these coin flips have landed on the right side, or have they been genuinely very good investments?

[ahnuld]

because commodities are always going to return less than equitites in the long run. Gains generally come from productivity increases and competitive advatages. Kinda hard to get those in commodities.

[spider]

I'm not an expert on this but I'm interested in the topic so I'll take a stab at it...

* Stocks have a very long and successful history. You can look at 100 years of data and make statements about how the real return has been about 7% real and 11% nominal. And the magnitude and direction of the risks is fairly well understood -- mostly you will do pretty well if you invest for long periods of time, though you can get burned in the short run and with bad timing you could pretty easily get below average returns over a 10 or 15 year period. And you can apply some theory here and say that stocks should return something related to business's ROI + a risk premium. There must be some finance undergrads here who can state that much more eloquently, but hopefully that gives you the flavor.

* Pure commodities (e.g. physical gold, not gold futures or gold mining) have historically earned the inflation rate. This pretty much also applies to housing (see the most current version of Shiller's Irrational Exuberance). In fact, until the last few years, people mostly bought commodities as an inflation hedge moreso than a true investment.

* Commodities futures -- I think this is where the action has been, but I'm not sure we know much about the long term performance. This paper notes that commodities futures have performed as well as stocks while offering extra diversification, but it's "only" 40 years of data. I believe this paper is considered to be very influential but I'm not an expert here. Interesting read in any case.

Also, check out this article by Jeremy Siegel.

[john kane]

why not trade/invest commodities for the short run though?

if you want sunshine all year round, you don't live in the place with the highest predicted average of sunshine all year round, you move to the places in each month (or day even) which has the highest predicted average sunshine in that month (or day even).

Admittedly you can't guarentee instead you may get bad variance, and when you arrive at your new place it could be thunderstorms, ruining the utility you gained from previous days of sunshine, but still, it should yield you the highest expected sunshine.

maybe i'm wrong, but when I see a lot of people making/made a lot of money, I'm interested to join in the fun [img]/images/graemlins/smile.gif[/img]

Maybe I've missed the commodity boat, but from what I've read there are still a few stops to go. then set up the CFD account and short short short [img]/images/graemlins/smile.gif[/img]

[pig4bill]

Buying index funds is like 2/4 limit - any idiot can do it and you don't have to know what you're doing. Trading futures is like high stakes no limit - you have to be bankrolled well and know what you're doing. It's amazingly simplistic to look at futures and say they don't always go higher and higher like stocks do. Contrary to stocks, it's just as easy to short futures as it is to go long, and it's essential to do at times. A good trader can make money in futures or stocks.

Personally, I stick to stocks because I can find ones with a specific story that's likely to move the stock right now.

[ahnuld]

yeah, most arguments here and right on the money. But kane, the point is long term you cant make anywhere near as much money. But short term you could. You just need to know those markets like the back of your hand.

[spider]

[ QUOTE ]
Just wondering why so many people go for equities? The recent last few years for commodities seems to of been great, why have so many not taken advantage?

[/ QUOTE ]

A couple more comments... Part of why commodities have done well is b/c more people have been buying them (or futures). Part of it is b/c the world economy has been great and demand from China in particular for oil, copper, and other commodities has just skyrocketed. I forget the exact percent, but if you look at oil demand over the last 10 years, most of the increase in demand is from China (though of course their level of demand is still a bit less than the US's).

But the question is whether the rise in commodity prices is permanent or temporary. I think it's fair to say that most people think it will be temporary given that commodity prices historically (100+ years) have basically increased at the rate of inflation. For most commidities, the cost is roughly going to equal the cost of extraction (mining/drilling). Unless you think there is some reason those costs will rise faster than inflation, it's hard to come up with a reason for the commodities themselves to increase faster than inflation.

Oil, of course, is a little different than the other commodities but maybe not as much as many people think as we get closer to the point where various substitutes become more feasible.

[iversonian]

Commodities don't earn dividends, i.e., when you're holding it, it's just sitting there not doing anything. Also, note that when you trade commodities futures, there's someone on the other side of the trade who's getting the exact opposite results you are. Basically, the only people who ought to be in the business of trading commodities are 1. those who produce and consume these commodities, and 2. those who are even better at trading commodities than those players in group 1.

[KDuff]

[ QUOTE ]
yeah, most arguments here and right on the money. But kane, the point is long term you cant make anywhere near as much money. But short term you could. You just need to know those markets like the back of your hand.

[/ QUOTE ]

Leverage is a much bigger factor in futures trading. If done successfully, like a Jim Rogers figure, your short term gains would exceed most investors' long term gains. Of course, futures markets are very competitive (and much more volatile) so it would be unreasonable to expect many traders to profit in the short term.

Futures are also taxed more favorably. I believe it's at 60% long term and 40% short term rates.

Some other poster mentioned the ease of shorting. There is no uptick rule.

[Tupacia]

Two words: risk premia. I could throw a dart at a stock table and I'll outperform bonds and pretty much every other investment over the long haul. If I did the same with commodities I'd be a net loser because of transaction costs.