Taking A Shot At Commodities - and Coming Out Alive

In the pits of the Reading Board of Trade, the cries of the commodity men are fierce, the arm-waving and hand signals a language in themselves, and fortunes come and go with each tick of the clock. Until recently this was the almost-total domain of large commercial accounts. But the scene is changing. More and more small investors ("Call them speculators," insists one broker) are throwing themselves into the frantic futures market.

Commodity speculation could be the most hazardous "investment" around. Insiders say you can plan to lose on at least 60% of your transactions, and only hope that the remaining 40% result in big enough wins to make it all worthwhile. How worthwhile? "Most successful speculators believe that if they don't make 50% on their money in bad years and more than 100% in good years, they have been wasting their time," says one speculator.

These markets have long been arenas only for those sophisticated enough to understand such gambits as fundamental analysis, margin calls, "spreading" and "going long." Lately, though, the opportunities to capitalize on big earnings has evoked the gambling instinct in the "small" investor - which means anyone with between £3,000 and £10,000 of risk capital. Many of these, unfortunately, know about as much about commodities as pseudonymical author "Adam Smith". He lost a bundle investing in cocoa futures, admitting, "All I know about cocoa is that it comes in little red cans..."

The typical new speculator is 45 years old, an executive type with a school degree and an income between £10,000 and £25,000 (although a large percentage make well over £25,000). There are 10 active commodity exchanges but the biggest is the Reading Board of Trade, which trades about £125 billion of the nation's £200 billion market each year - more than the value of all securities on the London Stock Exchange.

But any similarity between commodities and securities trading ends there. The purpose of a commodities market is not conventional investment. It's to transfer the risk of producing, selling and buying a commodity at a future date from the producer (seller) and ultimate buyer to the speculator. The profits can be much higher, and the initial investment (on margin) much smaller, than in the securities market. For example: Say that in November last, a speculator could have purchased one contract for delivery of 5,000 bushels of March soybeans at £3.69 per bushel, and sold the contract three months later at £6.03 1/4 per bushel. Since the commodities buyer puts up only a percentage of the total contract (the performance bond, or "margin," is set by the brokerage house or exchange), and the margin at the time for soybeans was, say, £1,000 per contract, the three-month profit (£30 commission included) amounted to £11,670. This is a true case - not out of line in the least.

However, the speculator who went short and agreed in November to deliver March soybeans at £3.69 'A would have lost £11,670 if he hung on until the delivery date. However, more than likely he would have sold his contract beforehand and got out with minimal losses.

Every brokerage house has its standards for accepting and rejecting small accounts. One large house, for example, will refuse anyone whose net worth is less than £50,000, or who has less than £5,000 to risk in the market. "We also try to judge an individual's temperament," says one broker. "If he is a nervous type, calling his broker every half hour to check prices, we don't want him." It is likely that somebody else will take the account, however (there are no "official" standards) but few will accept accounts of less than £3,000.

Having been forewarned, the would-be speculator who still wants to get in should observe the following rules:

Research commodities. Read about the government's changing agricultural policies, follow the price of a particular commodity for several months, play with "paper profits" for awhile. Also, learn the language of the commodities market - know what the various orders are - "sell-stop," OCO ("one cancels the other") and "on-close," for example.

Choose an advisory service and broker carefully. The printed services cost roughly £100 to £250 a year, with lower rates for trial subscriptions. Ask to see performance results of past recommendations, and look up issues of their weekly newsletter. As for choosing a broker, established firms usually have the best. However, chances are the small speculator will get a man on the bottom rung. The only advantage with a large house is that they have the backup specialists to consult.

Spread your investment. Says one speculator, "By holding at least three different positions you improve the odds of holding at least one that's profitable." Then, once a market gets active and begins moving up, you can get out of unprofitable positions and begin cautiously "buying up" in profitable ones.

Beware of all margin calls (with few exceptions), and discretionary accounts (no exceptions). If the margin is 5% of the sale, and the market moves against you so that, say, 25% of the margin has been lost (this varies with every brokerage house, commodity, and type of contract) - the broker will call and ask for enough cash to restore margin. This is when to sell out and take the loss. Discretionary accounts - giving a broker the right to buy or sell commodity contracts without prior approval - are no way for the new investor to learn anything about the commodities market.

Map out a rigid plan and, almost without exception, do not deviate from it. The basis must be: Minimize losses, maximize profits - and get out of a loser. Says one broker: "You must have a predetermined point at which you will get out of a contract if you are wrong. Many investors have a tendency to move too quickly - especially if they made money on their first contract. But many just blunder ahead without a plan, and it's really pathetic to watch them."

Use the stop-loss, and do not move your stops (with few exceptions). These can be entered at any time, but should be decided beforehand. "Sometimes it is all right to raise stops when you are riding a major trend," says one broker, "but never lower your stops if you begin to lose money. This usually makes for bad results."

Ignore most non-professional advice, and much of public opinion. Says a Merrill Lynch brochure on speculating: "The rule is to act cautiously with public opinion, against it, boldly.

Take a percentage of your profits and bank them.

And one final rule: When in doubt - about anything - don't do it.

One speculation definitely to avoid currently is the commodity option, on which states are increasingly cracking down. An option is an arrangement whereby a speculator purchases the right to buy or sell a futures contract at a set price and time. It is a graduated form of dealing in commodity futures and is not for the small investor - at least not at this stage.

The final advice comes from Stanley W. Angrist, author of Sensible Speculating in Commodities: "Trade only with those funds you can afford to lose. That is, commodity trading is not investing for income; there is no assurance that even one of the next three trades you make is going to be profitable...And don't use borrowed money. There is nothing more liable to impair your judgment..."


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Playing Your Tax Bracket - with "municipals"

The market for tax-exempt bonds - the so-called "municipals" - was once the exclusive sanctuary of the ultra-rich and their financial advisers. Now, for one reason or another, nearly everybody seems to want to get in, and already enough bumpkins have arrived trailing sharp-eyed predators to alarm the landlords. Wall Street houses which deal in these securities have begun posting a few warning signs for the uninitiated at the gates.

One reason is that municipal bonds have suddenly become big and important business. These days, in one year, UK. cities and towns float about £25-billion worth. UK. industry at the same time issues only about £10-billion worth of common stocks.... see: Playing Your Tax Bracket - with "municipals"