Trader Vic on Commodities

Short sales can be made without the necessity of borrowing that stock
entails.

Many markets can be traded 24 hours a day to some degree, due to
common markets throughout the world and through the use of electronic
marketplaces such as Globex.

There is always a cash market to compare the futures price to, so unlike
many equities, the market price must in most respects be tied to
realistic forces and factors.

From an individual’s perspective, futures should be easy to comprehend.
The price of a pound of sugar or a gallon of gasoline is something
every person can relate to, while the compounded annual growth
rate of a multinational corporation, or the year-over-year same-store
sales for a chain of jewelry stores might be more difficult for average
investors to wrap their minds around.

Perhaps most importantly, futures trades are marked-to-the-market on
a daily basis. When a position moves in your favor, you’ve made the
money, whether you choose to close out the trade at that point or not.
Likewise, losses are incurred immediately. This forces an investor in
the futures market to constantly reevaluate positions and the rationale
behind each of them. This eliminates the “I’ll wait for it to come back” mentality, which results in people winding up with accounts full
of worthless penny stocks, good only for tax-loss sales at the end of
the year.

Commodities don’t go bankrupt like some companies do. But because
they are cyclical, you must adopt a long and short strategy to generate
returns above T-bills. For example, corn was $0.80 a bushel in 1930,
and as I write this is $3.68 a bushel. That’s only a 2.0 percent compounded
return in 77 years. In the last 37 years, corn has traded almost
exclusively between $1.50 a bushel and $5.50 a bushel (except for a
spot price spike in the mid-1900s), passing $2.50 75 percent of the time
(see Figure P.1). Perhaps that is fair value?