(BD) Bernstein; Against the Gods
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i have read it 4 times and learn something new each time. the book rocks !
surfer
surfer
Bernstein rocks in general my man...I won't bother you by saying another time after this, by why don't you place these threads in the Resources forum. Great job with posting them.
It's about the history of trying to predict the future. Starts at the beginning with weather famine and floods, goes on to dice, then the financial markets. So far no one has successfully predicted the future. Ends with chaos theory.
Excellent book, well written. Very good for getting your head together. If your head aint together, nothing else is going to matter anyway.
Well I'm going to go against the grain on this one. I think the book is 'ok' at best. It actually contains a lot of errors and mistakes.
Here is an excerpt from page 306. Judge for yourself:
[To set the context, he is talking about farmers being helpless in the face of volatile commodity markets in a chapter devoted to derivatives.]
"On occasion, the other side of the deal is a speculator -- someone who is willing to take over the uncertainty from others out of a conviction about how matters will turn out. In theory at least, speculators in commodities will make money over the long run because there are so many people whose financial survival is vulnerable to the risks of volatility. As a result volatility tends to be underpriced, especially in the commodity markets, and the producers's loss aversion gives the speculator a build-in advantage. This phenomenon goes under the strange name of 'backwardation'."
I disagree with several points Bernstein makes:
1] How in the world does he conclude that since many farmer's financial survival depend on commodity markets, this means that speculators make money over the long run? Commodity markets are zero sum games (unless hedging) and some would argue negative sum (including commissions/spreads/slippage)
2] The 'phenomenon' that he describes as backwardation is actually just a market condition where spot rates exceed forward rates. Contango is the opposite condition where forward rates exceed spot rates.
This phenomenon has nothing to do with "the producer's loss aversion" or volatility but it is based on what players in the market believe will happen in the future in terms of supply and demand
3] Both players in the commodity markets are loss averse, not as Bernstein states, the producers. Or am I missing something? Haven't yet met a speculator who just loves to bleed his account. The speculator does not have any advantage just as the farmer has none. The producer is simply transfering risk to the speculator.
Is it just me or is Bernstein out to lunch ?
Here is an excerpt from page 306. Judge for yourself:
[To set the context, he is talking about farmers being helpless in the face of volatile commodity markets in a chapter devoted to derivatives.]
"On occasion, the other side of the deal is a speculator -- someone who is willing to take over the uncertainty from others out of a conviction about how matters will turn out. In theory at least, speculators in commodities will make money over the long run because there are so many people whose financial survival is vulnerable to the risks of volatility. As a result volatility tends to be underpriced, especially in the commodity markets, and the producers's loss aversion gives the speculator a build-in advantage. This phenomenon goes under the strange name of 'backwardation'."
I disagree with several points Bernstein makes:
1] How in the world does he conclude that since many farmer's financial survival depend on commodity markets, this means that speculators make money over the long run? Commodity markets are zero sum games (unless hedging) and some would argue negative sum (including commissions/spreads/slippage)
2] The 'phenomenon' that he describes as backwardation is actually just a market condition where spot rates exceed forward rates. Contango is the opposite condition where forward rates exceed spot rates.
This phenomenon has nothing to do with "the producer's loss aversion" or volatility but it is based on what players in the market believe will happen in the future in terms of supply and demand
3] Both players in the commodity markets are loss averse, not as Bernstein states, the producers. Or am I missing something? Haven't yet met a speculator who just loves to bleed his account. The speculator does not have any advantage just as the farmer has none. The producer is simply transfering risk to the speculator.
Is it just me or is Bernstein out to lunch ?
Thanks Profit sounds interesting. I will seek out the book and have a look at it. Babak sounds like he knows the book pretty well and has spent some time dissecting it. Conflicting opinions..... that's what makes this world so interesting, and of course profitable. Guess I'll just have to pick up the book and form my own opinion.
Thanks to both Profitseer and Babak!
Thanks to both Profitseer and Babak!
Babak,
That quote sounds like nonsense. Farmers or producers and speculators are hardly the only participants. There are also end users, ie commercials. They, not spec's, take the "other" side of most hedging transactions.
That quote sounds like nonsense. Farmers or producers and speculators are hardly the only participants. There are also end users, ie commercials. They, not spec's, take the "other" side of most hedging transactions.
The point I think was, Hedgers want to lay risk and are willing to pay. Speculators are willing to accept risk and want to be paid. So theoretically, the system favors the speculator if nothing unforseen happpens.
Just like the actuarial tables tell us theoretically the insurance company should make money and the policyholder should lose money.
Yet every so often the favorite takes it in the shorts. We all know the fate of most speculators, but ever wonder why? How in the world? Does some fine old money big stone building New England insurance company end up on the verge of bankruptcy?
Perhaps what we need are enhanced risk predictors. hmm, let's see, the correct odds of two big skyscrapers in NYC being blown up on the same day are....yeah, we'll take that bet.
Just like the actuarial tables tell us theoretically the insurance company should make money and the policyholder should lose money.
Yet every so often the favorite takes it in the shorts. We all know the fate of most speculators, but ever wonder why? How in the world? Does some fine old money big stone building New England insurance company end up on the verge of bankruptcy?
Perhaps what we need are enhanced risk predictors. hmm, let's see, the correct odds of two big skyscrapers in NYC being blown up on the same day are....yeah, we'll take that bet.