Commodities Trading Basics

In God in the Pits: the Enron-Jihad Edition, Mark Ritchie, a former pit trader and a founding partner of Chicago Research and Trading addresses a group of businessmen on a wise approach on investing in commodities:

"Why," I said to his audience of investors, "would you want to take your hard-earned money, put it in an extremely high-risk industry where statistics are stacked horribly against you, and invest in some 'thing' somewhere about which you are almost totally ignorant?" My approach was so simple and obvious it drew laughter. "Does that sound smart? It's probably because you have complete confidence in your adviser-broker. But did you ever ask him how much of his own money he has put behind his advice?

"When he tells you he can't afford it, doesn't that make you wonder about his past recommendations?" I explained how the complexity of the marketplace enables almost anyone, armed with a few clever tricks, to develop a trading system that looks profitable. He may even convince himself that his system is profitable. One thing is certain, though: It is simple to demonstrate a sure thing to even the most intelligent of investors. The vast array of so-called profitable systems currently for sale at astronomical prices confirms the high demand for quick money.

"I have been asking for years," I told my audience, "and am still asking: Why would anyone ever sell a profitable system? I have never heard a satisfactory answer to that question.

Guide to Commodity Trading

"Of course there is my answer, long scorned by the less scrupulous wing of the industry: It is no longer-probably never was-profitable. Naturally, any system can be demonstrated to have had a profitable track record at some time in the past. Appeal to past performance is, after all analysis is complete, a sophisticated way of saying that since there have been Lotto winners, the lottery must be a good investment."

At the conclusion I asked if there were any questions. There were a number. "Your soapbox routine is quite convincing," the first one commented. "I'll never invest in commodities again. But you have left us quite puzzled as to why you continue to invest and how you can make money if money can't be made? I've heard it suggested by commodity advisers that some traders want us out of the market so they can keep all the money for themselves. How would you answer that?"
"May I ask you, sir, since you started this, what is your profession?"
"I'm a surgeon," he answered.
"And you make good money doing surgery?" I asked.
"I have a good practice, yes."
"Look," I said to him, "I'm pretty good with my hands and I love to work with the human body; do you think I could be a surgeon?"
"Well, it's demanding work, but if you wanted to badly enough, you might be able to become a surgeon."
"That's great!" I responded. "I'd like to start this weekend. How much money do you think I could make doing surgery this weekend? I only want to work weekends and evenings, y'know, some income to augment my regular trading." They got the point.
"I have no objection to seeing any of you come into the business," I concluded. "I welcome you. But I do object to the part-time, armchair trader who thinks he is going to outsmart the marketplace and make a fortune in his spare time. This poor fool is little more than a bankruptcy looking to happen."

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