Almost every conversation about markets is a conversation about direction. Will gold go up. Is oil cheap. Where does the rupee settle. Direction is the most interesting question and close to the least important one, because it is the only variable in the outcome you do not control.
What you actually control
- How much of the book any single position represents
- Where the position is invalidated, decided in advance
- How correlated your holdings are to one another
- How much leverage sits underneath all of it
Each of those is a decision, taken calmly, before anything is at stake. Direction is a forecast. The industry spends its time on the forecast because the forecast is what sells, and almost none on the four decisions that determine whether the forecast ever gets a chance to pay.
A portfolio that survives a bad quarter gets to participate in the good one. That is the whole strategy.
The correlation trap
Gold, silver, platinum and palladium held together is not four positions. It is one position, sized four times, that will move as a block on the same dollar headline. The same is true of a long-WTI, long-Brent, long-energy-equity book. Diversification means holding things that fail for different reasons, not holding four things with different tickers.
Leverage is a time limit
Leverage does not change whether you are right. It changes how long you are allowed to wait to find out. A correct view on a five-times-leveraged position that is stopped out in the drawdown before the move is, financially, identical to a wrong one. This is the most expensive lesson in the market, and almost everyone pays for it in cash rather than reading about it first.
Educational use only. This piece is general market commentary published to everyone at the same time. It is not a personal recommendation, takes no account of your circumstances, and must not be relied on as investment advice. Commodity trading carries a substantial risk of loss.