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

[iversonian]

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Commodities don't earn dividends, i.e., when you're holding it, it's just sitting there not doing anything.

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Not exactly true. You only need to put up a few percent margin to purchase a commodity futures contract. The rest can be invested in interest-bearing instruments. (T-bills being the instrument of choice for most futures traders.) The interest income can be thought of as a type of dividend.

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You can't count the margin that's held in treasures to be part of the return that commodities return. That's like saying if you're at the 0% house edge blackjack table and the casino asks you to post $10k to be extended $20k in credit, that you're playing a +EV game as long as the casino sweeps the $10k into treasuries on your behalf. You're foregoing the interest on the $10k by posting it for the duration of your play time, so you can't take credit for that as part of the returns on investing in commodities.

To give another example, suppose I enter into a $20k futures contract with you. We both find someone willing to guarantee our respective ends of the contract with a deposit of $10k (and with no fees charged). At the settlement date, the spot is identical to the futures price, and we made $500 each on our deposit. It would be wrong to attribute any of that return to the commodity. The futures contract will pay off what it will pay off, and the interest on the deposit will be what it will be. If anything, being forced to post a deposit should be considered a cost of entering into the contract since it restricted our freedom of choice.

[Tupacia]

I understand your distinction DesertCat between stocks and commodities, I just don't think it proves anything. Real estate is still a good investment even though it is only worth what people will pay for it. But Julian Simon's argument is interesting, have never thought about that before.

[maxtower]

Real Estate isn't exactly the same as commodity investing. Real Estate can and should be run like a business. You buy a house and rent it out. The rent is your dividend. The appreciation should increase with inflation.
Commodities on the other hand have no rent payments. In fact it can cost something to hold them. This gives them a slightly negative return adjusted for inflation.

[Preem]

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* 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.

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This is really a seminal piece of research.

It explains why commodities futures, in the right dose, can reduce a portfolio's risk without significantly harming return.

Here's another article that tries to explain the concept.
How Worldly Is Your Portfolio?

[DesertCat]

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Real estate is still a good investment even though it is only worth what people will pay for it.

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Max pretty much answered this, real estate is only worth what the underlying rents make it worth. Just let me add that the bubble of the last years happened when too many people forgot this principle and started paying prices that weren't justified by rents.

[DesertCat]

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* 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.

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This is really a seminal piece of research.

It explains why commodities futures, in the right dose, can reduce a portfolio's risk without significantly harming return.

Here's another article that tries to explain the concept.
How Worldly Is Your Portfolio?

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They cherry picked the end date. If they had finished the study as little as a year or two earlier, the total returns would have been cut substantially. The SPCI-G (S&P Commodity index Geometric series) was at 1360 at the end of their study (Dec. 04). It was at 822 three years earlier, those last three years increased returns by 70%.



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Here's another article that tries to explain the concept.
How Worldly Is Your Portfolio?

"Quite simply, by dividing your money between just two types of investments, you take on more risk than you would by spreading it over a variety of assets that rise and fall at different times"


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Emphasizing "fall" is appropriate for commodities, because historically, that's what they've mostly done. From Dec. 1979 to Dec. 1999 the index went from 1778 to 904. Ouch, losing half your money while inflation takes another half. Unlike stock indexes, which understate actual returns because they don't include dividends, the commodities indexes are raw charts of pain over many periods. From 1970 to now, even in this huge bubble we are going through, the SPCI-G has gone from 625 to 1514. That's not remotely keeping up with inflation.

If you look at S&P's price histories, you'll indeed see that futures tracking indexes do much better than the raw commodities indexes as the study claimed. But it's not magic. It's because the futures indexes include include cash interest earned in the required margin accounts. When you have a depreciating investment, even margin interest is going to have a substantial positive affect on returns over time.

Raw commodities are clearly uncorrelated with stocks. But their horrible long term returns don't make that much of a value. Commodities futures have a much better track record, on par with stocks the last 40 years, but I still have some skepticism due to the recent bubble and some possible data influences. In the case of the SPCI the indexes are new, and the data was recreated from historical records. Indexes are created to be sold, and when presented with a thorny issue the creators are biased to choose the answer that makes historical returns as high as possible.

[RedJoker]

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im willing to take risks, hopefully multiple big risk investments but with managable amounts invested in them.

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Didn't you sell a large amount of gaming stocks right after the market fell?

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for example, one of missmisery's investments which he has been a very strong advocate of, strateco resources. I invested in this 6 weeks ago or so. It's a company which deals with a resource (uranium) with has experienced huge price rises and still has some way to go (hopefully), in addition it has huge potential, with little downswide. kinda like the best value stock in a booming sector.

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i can only lose my ass if i invest my ass, im waving my ass near the market, if it gets too hot, ill walk away, im not going to charge in there ass-first ready to risk getting it turned into charcoal if the stocks go bellied-up.


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So you consider this stock undervalued, but, if the stock were to fall and 'get too hot' you would 'walk away' despite the company being even more undervalued?

I really hope for your sake that the market never falls, because I can see you getting out at the bottom multiple times until you change your mindset. Or at least stop reading whatever it is you read.