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on my total portfolio. If the result was three groupings, then I would be very concerned. If one of those three groups sustained major losses, then this would prove disastrous. |
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Factor analysis provides another benefit for investors interested in spreads. Within each group there are a number of highly correlated commodities. For example, one group may contain grains, another European currencies, and so forth. I found the commodities within a group, although highly correlated, have a spread that widens and narrows. If an investor wants to trade spreads, then factor analysis can identify potential spreads. Any single group contains a number of commodities with the potential for spread trading. |
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Neal: Concerning risk: Why is it the average investor doesn't understand that the more money he puts into the markets, the more money he can lose? This question is directed to the entire committee and I will write a composite answer. |
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Committee: The speculators' driving need for a system is their attempt to control risk. Pyramiding profits is the way to financial oblivion. Many speculators don't understand regression to the mean. The speculator starts out with some wins and then hubris kicks in. They put in more trades with higher risk and then they're hit with major losses. Chicago traders understand regression to the mean, and they know that in the long run, speculators will lose. Regression to the mean applies to everyone. Look at this year's hot superstars; their overall long-term performance will be average. |
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Let me expand a little more on risk. Neal, as you've stated, ''Everyone spends his whole life trying to control risk, but there is always a torpedo with your name on it, aimed right at you." A speculator can go to seminars and listen to gurus say, "You can make a lot of money with little risk." Don't believe it. Look at the performance of stock managers versus the stock indices. Most underperform the market. If professional money managers have a hard time beating the market, then how |
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