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

[missmisery]

I won't discuss commodities vs. general equities. But if you want to invest in copper/gold or whatever, you have much more leverage with equities. For example, let suppose a gold mining companies that produces gold with a cost of 300$/oz. If gold jumps from 600$ to 1200$ (a 100%) gain, your company will profit 900$/oz instead of 300$/oz. So basically the share price of the company shoud increase by 200% on a 100% raise of the spot price. If you use the same example but you suppose tha the company produces gold at 500$/oz, then you get tremendous leverage as they would profit 700$/ instead of 100$, a 600% gain.

I follow commodities very actively but I trade the resource sector equities... More risk, more volatility and more upside.

[squiffy]

This discussion has arisen before.

But basically it's a very different analysis. Trying to figure out whether Best Buy is properly valued as a business operation and trying to analyze it's future profits is a different calculation than trying to figure out what will happen to the future price of grain, based on consumption and production and weather and politics etc. in China, Russia, India, U.S., Japan, etc. etc. etc.

It's an even greater contrast if you pick a company that solely sells in the U.S. market and has little or no profits derived from overseas operations.

[Brad1970]

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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.

[/ QUOTE ]

Pig makes a good point here...why try to compete with a bunch of commodity experts for a few short term gains when you could do just as well by taking the long term view & sticking those same dollars into mutual/index funds.

[john kane]

thanks for all the replies.

the general consensus seems equities are a wiser investment becuase of their historical greater growth.

i understand that, just given the recent huge growths in some commodities, i still fail to understand why people have not invested in them or in resource sector equities. im not saying i think people should do it for 2+ years, just for say 6-12 months in gold, silver and uranium for example. enjoy the price rises while they should still occur.

my feeling is that those people who are aiming to make big bucks are those going for commodities, and those people looking for a safe 10%-15% long term (10 years+) return are going for equities.

personally im in a controlled rush (if that makes any sense), earning 10% of 100K doesn't do it for me, earning 20% does. now i know about warren buffet and how he couldnt even manage that, but i'm willing to take higher risks, im willing to lose a bit. what im looking for is going for undervalued companies with great growth potential, im willing to take risks, hopefully multiple big risk investments but with managable amounts invested in them.

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.

these are the companies im looking to invest in. i feel im learning all the time, i guess im a 22 year old with 95K or so looking to make some decent returns. if i lose some, so be it, i should be a kid coming out of university with 15-20K in debts, i just am willing to invest in high risk companies which have proportionally higher returns than should be expected at that level of risk.

anyways, enough ramblings,

thanks as ever for your replies,

john

[eastbay]

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im not saying i think people should do it for 2+ years, just for say 6-12 months in gold, silver and uranium for example. enjoy the price rises while they should still occur.


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Should, huh?

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personally im in a controlled rush (if that makes any sense)


[/ QUOTE ]
You're going to take big risks, but you're going to do it safely.

You're going to gamble a lot, but only do it a little at a time.

You're going to take a cautious approach to throwing caution to the wind.

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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.

[/ QUOTE ]

With all due respect you are talking like someone who is about to lose his ass in the markets.

eastbay

[john kane]

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[ QUOTE ]
im not saying i think people should do it for 2+ years, just for say 6-12 months in gold, silver and uranium for example. enjoy the price rises while they should still occur.


[/ QUOTE ]

Should, huh?

[/ QUOTE ]

i believe it will more likely go up than down. i base this on what i have read and a balance of other peoples' opinion.

[ QUOTE ]

personally im in a controlled rush (if that makes any sense)


[/ QUOTE ]
You're going to take big risks, but you're going to do it safely.


[/ QUOTE ]80% of my money will be in savings, poker bankroll, the other 20% i want in high risk-high return investments. sorry i should of mentioned this earlier.[ QUOTE ]

You're going to gamble a lot, but only do it a little at a time.


[/ QUOTE ] again what i invest i will invest in high risk[ QUOTE ]

You're going to take a cautious approach to throwing caution to the wind.


[/ QUOTE ] same as above, i don't see what the difference is between an approach of investing in undervalued volatile stocks and undervalued low volatile stocks bar the neccessity with the former to have a high risk tolerance of your investment. i have given the small amount i am investing with.

i like to think of it as playing tight aggressive, what i do put into the markets, i put into a select number of stocks which are undervalued and highly volatile. i can't go broke becuase im only playing with 20% of my bankroll. the other 80% im grinding at 1-2 limit.
[ QUOTE ]
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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.

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With all due respect you are talking like someone who is about to lose his ass in the markets.

eastbay

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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.

thanks for the reply, its replies like this which is why im only putting in max 20% unlike that 50% or so i was putting in when i first started doing this and posting here a few months ago. maybe come the summer ill look back and of learnt more. hopefully [img]/images/graemlins/smirk.gif[/img]

[Jeff W]

[ QUOTE ]
i understand that, just given the recent huge growths in some commodities, i still fail to understand why people have not invested in them or in resource sector equities. im not saying i think people should do it for 2+ years, just for say 6-12 months in gold, silver and uranium for example. enjoy the price rises while they should still occur.

[/ QUOTE ]

I hope your crystal ball is in good working order. I wonder if you'd be playing the same tune back when tech stocks were the hot ticket.

[NajdorfDefense]

Storage costs, less liquid, insurance costs, negative carry in many cases, ad infinitum.

[uppie_]

come all I wanna see his pics of a 50 barrels of oil in his back yard

[gull]

JK:

It's not just the history of prices. Theoretical expectations (which, although, have been determined from history) for commodities are lower.

Also, this isn't an issue of high risk and high reward. Commodities offer high risk and low reward. They do not belong in a portfolio. If you want to make money quickly, you should load up on the highest reward assets, not low reward assets. Some of the poker analogies above seem misleading to me. Here are some better analogies:

individual stocks are like playing 10/20 hold 'em

index funds are like five-tabling 2/4 hold 'em

commodities are like playing $50 blackjack

Individual stocks have the same expectation as index funds, but lower variance. Some people spend a lot of time trying to pick the best stocks (i.e., selecting the juiciest 10/20 table). It's true that leveraged commodities can have the biggest upshot. That doesn't translate into a higher EV though. Blackjack, no matter how high the stakes, will be a less profitable game than hold 'em.

There is a case to be made for commodities futures, however. They do have an expectation higher than inflation (unlike commodities alone), and arguably stock-like returns. Commodities futures funds can be a very strong diversifier. They go up when stocks and bonds go down (in an inflationary environment).