As I mentioned in this post, I got rid of DBB — the base metals ETF. Admittedly, I'm hanging my head in shame — not because we lost money (actually, we made money) but because I made a stupid judgment mistake that cost us opportunity. (Fortunately, there's a lesson in here.)
My mistake was not in my evaluation of the commodities or reasoning for buying them. The mistake was that I bought an investment that grouped the three together instead of buying a virtual certainty.
In buying DBB, I decided that the three base metals in DBB — copper, zinc, and aluminum — would all move more or less together. Producers were scaling back and still the prices of these commodities crashed. I figured that, when the world realized it wasn't coming to an end, all three of these would move back up together.
Well...I was wrong.
Copper did exactly what I expected; zinc started its run up; aluminum disappointed. If I had held these commodities individually, I would have sold copper, held aluminum, and considered dumping zinc. Instead, I bought them together and had a "group" decision.
My Dilemma
With copper at a fair price, I had a choice — hang on to DBB and hope that zinc and aluminum returned to more rational levels, all while hoping that copper bubbled up or, at the very least, didn't fall much, or sell.
Personally, I don't think that hope is a very intelligent investment strategy; so, I sold.
My "Whoops" Cost Us Opportunity
On April 4th, we bought the three commodities together through DBB. We earned roughly 11.6% in two months — a great return in and of itself. Here's where I screwed up: in the absence of a pure aluminum or pure zinc ETF, I bought them together with copper through DBB. (I could have purchase a pure copper ETF in JJC.) Instead of buying just JJC, knowing that copper was cheap and that it would move up at some point, I bought the three metals knowing they were cheap and that they would move up at some point. Unfortunately, I tried to get greedy, they didn't all move up together at the same pace, and we missed an opportunity.
What was the real opportunity cost? If I had not gotten creative and simply purchased the copper ETF, accepting that I would miss the boat on aluminum and zinc, we would have earned JJC's 17.7% return.
The Base Metals Lesson
Considering the markets over the past two years, it's odd that someone might say, "Well, we made money, but here's where we screwed up." Still...we made money, but here's where we screwed up:
Creative is stupid. (Just ask the folks at Lehman, AIG, Merrill, Bear Stearns, etc.)
When you have a great idea, you should zero in and make meaningful bets. Keep it simple and don't allow too many variables into the equation. And that's one main premise of the book — bet on virtual certainties.
The virtual certainty was that copper, aluminum, and zinc would all rise in price. The variable that I introduced into the equation was that they'd all rise contemporaneously.
And that cost us an opportunity.
Good Ideas are Rare. Bet Big, but Bet Smart.
Good investment ideas are rare. I'd be ecstatic to find one a quarter. In this quarterly or annual search for a great investment opportunity, you'll make some bonehead moves. Sometimes you'll lose money. That sucks, but you can always make more back.
It's the lost opportunities that can kill your returns.
With DBB, I can fall back on Buffett's "I would rather be vaguely right than precisely wrong" and sleep peacefully tonight. Still, the next time you see prices out of whack, stick to the simple investment that is virtually certain to work out well with as few variables as possible and maybe you won't have to admit to the world that you're a bonehead too.
Joe Ponzio
http://www.fwallstreet.com/
My mistake was not in my evaluation of the commodities or reasoning for buying them. The mistake was that I bought an investment that grouped the three together instead of buying a virtual certainty.
In buying DBB, I decided that the three base metals in DBB — copper, zinc, and aluminum — would all move more or less together. Producers were scaling back and still the prices of these commodities crashed. I figured that, when the world realized it wasn't coming to an end, all three of these would move back up together.
Well...I was wrong.
Copper did exactly what I expected; zinc started its run up; aluminum disappointed. If I had held these commodities individually, I would have sold copper, held aluminum, and considered dumping zinc. Instead, I bought them together and had a "group" decision.
My Dilemma
With copper at a fair price, I had a choice — hang on to DBB and hope that zinc and aluminum returned to more rational levels, all while hoping that copper bubbled up or, at the very least, didn't fall much, or sell.
Personally, I don't think that hope is a very intelligent investment strategy; so, I sold.
My "Whoops" Cost Us Opportunity
On April 4th, we bought the three commodities together through DBB. We earned roughly 11.6% in two months — a great return in and of itself. Here's where I screwed up: in the absence of a pure aluminum or pure zinc ETF, I bought them together with copper through DBB. (I could have purchase a pure copper ETF in JJC.) Instead of buying just JJC, knowing that copper was cheap and that it would move up at some point, I bought the three metals knowing they were cheap and that they would move up at some point. Unfortunately, I tried to get greedy, they didn't all move up together at the same pace, and we missed an opportunity.
What was the real opportunity cost? If I had not gotten creative and simply purchased the copper ETF, accepting that I would miss the boat on aluminum and zinc, we would have earned JJC's 17.7% return.
The Base Metals Lesson
Considering the markets over the past two years, it's odd that someone might say, "Well, we made money, but here's where we screwed up." Still...we made money, but here's where we screwed up:
Creative is stupid. (Just ask the folks at Lehman, AIG, Merrill, Bear Stearns, etc.)
When you have a great idea, you should zero in and make meaningful bets. Keep it simple and don't allow too many variables into the equation. And that's one main premise of the book — bet on virtual certainties.
The virtual certainty was that copper, aluminum, and zinc would all rise in price. The variable that I introduced into the equation was that they'd all rise contemporaneously.
And that cost us an opportunity.
Good Ideas are Rare. Bet Big, but Bet Smart.
Good investment ideas are rare. I'd be ecstatic to find one a quarter. In this quarterly or annual search for a great investment opportunity, you'll make some bonehead moves. Sometimes you'll lose money. That sucks, but you can always make more back.
It's the lost opportunities that can kill your returns.
With DBB, I can fall back on Buffett's "I would rather be vaguely right than precisely wrong" and sleep peacefully tonight. Still, the next time you see prices out of whack, stick to the simple investment that is virtually certain to work out well with as few variables as possible and maybe you won't have to admit to the world that you're a bonehead too.
Joe Ponzio
http://www.fwallstreet.com/
