What A Difference A Day Makes and Will Make

On the heels of bearish USDA crop reports, grains and soybeans traded limit down on the last day of the month and, likewise, the last day of the quarter. 

May Corn closed down its 40c limit.  May Wheat and May Soybeans both closed down a penny off their 50c limit. Today, Good Friday, is a market holiday, with the term "holiday" used lightly.  Given their hard closes, it is possible these markets can open Monday morning limit down again. 

For those new to commodities, a "limit" move means the market cannot be traded.  If you are long and the market is "locked limit down" against you, you cannot get out.  It has to trade above its limit or you have to wait another day.  Commodity markets have been operating like this over a century and it works.  Without limits, there is no "cooling off period" and you can end up having events like a "flash crash" which the stock markets have learned the hard way. 

What's interesting about this move is its timing.  Yes, limit moves frequently come after crop reports but coming before a holiday with those caught having to wait three days or more before they can get out, well, that is somewhat remarkable.

A Triumph for Indexing

March 5^th 2013 was a day of triumph for indexing. 

 

That day, the Dow Jones Industrial Average fully recovered from its 2009 financial collapse. As it has during every other past bear market, the index overcame all the negative headlines, all the shrill bears, the extremist doomsayers, the scorching US presidential campaign, unending political conflicts and even those cool pessimistic analysts to not just fully recover from the massive drawdown of 2009 but to, more recently, post new all-time highs.

These past weeks offer, once again, evidence of the superiority of indexing for investors seeking long-term capital appreciation. If nothing else, March 5^th should silence the critics of indexing methodology.

Few active managers have outperformed the indexes over the last four years (or any period, for that matter). Once again, the long-term index investor prevails with minimal costs, minimal trading and excellent, if not maximal, returns. Of course, indexing risk (or market risk) may be a little higher than what could be obtained by the rare disciplined manager. Proper indexing, though, offers its own form of long-term risk management.

It's funny how this triumph is hardly noticed in the press or by most financial professionals. There is actually little incentive for financial pros to promote indexing. Indexing is a direct challenge to active management of all flavors and the active manager's fees.

Good managers exist but the the selection process is far too difficult for most investors. It's a luck of the draw of the distribution of manager returns. Indexing avoids this process and avoids the many catastrophes of those chasing yield.

As a commodity manager who is a proponent of indexing, these results are gratifying.  The case may yet be made that equity indexing results equally apply to commodities.  I  believe they do.  Indexing is a secular methodology that is applicable to all fairly traded assets.   To the extent that commodities are properly screened, well-constructed and correctly weighted, proper commodity indexes offer the same benefits as their equity peers.

Today’s commodity markets are down and significantly off their highs.  A properly executed indexing strategy combined with today's lower market levels make this both a tested and timely opportunity.

Accidental Investing

On Bloomberg TV I just saw an add for Invesco showing a couple who supposedly did not look at their portfolio for nine years.  It showed their portfolio "blown up" due to "accidental" investing.  Their pitch was for "intentional" investing.  Is intentional investing better than accidental investing?

If we presume that accidental investing is long-term index buy and hold, we can make an evaluation of a $100,000 investment in the Dow Jones Industrial Average tracking Diamonds ETF (symbol DIA). 

Nine years ago, on 3/8/2004, DIA closed at 105.14. As I write, the DIA is at 143.51.  Adjusted for reinvested dividends, the DIA cost is $84.74 per share. 

Thus a buyer of 1000 DIA shares paid $105,140 plus commissions on 3/8/2004.  Today, that same investment, excluding dividends, is worth $143,510 less commissions.  Assuming $10 commissions on each side, that portfolio rose 39.12% (3.74% per annum) on price appreciation only.  If you include reinvested dividends using the adjusted cost, the total gain for over nine years totals 69.34% (6.03% per annum).

This is hardly a portfolio that blew up.  This is a portfolio that cost minimal commissions, had no capital gains distributions, paid dividends and performed admirably during a most turbulent time in our financial history. 

While other other investors may have done better or, more likely, worse during this period, I think it's clear that this basic buy and hold portfolio did not blow up.  If this past week when the Dow recovered all its losses from the 2009 collapse is not clear evidence of the superiority of buy and hold indexing than nothing is. 

While the jury may still be out regarding commodity indexing, I believe that commodity indexes will similarly outperform over the long term.