09 August 2008

Be Sure You Guess Right

At a message board where I regulartly go to vent, one of the other venters asked us all the question: "Do you wish you were an oil speculator right now?"

I do. Oil's gone from the mid-high 140's to 115. Someone's getting really rich off of this.

The big swings is always where the biggest money is made.

I think this thread has the potential to be a lot of fun. How many of you reading this thread right now didn't know that commodities speculators make money when the price goes down?

This shows a wonderful naivete that thinks of itself as sophistication. Speculators make money when the price goes down? Wow, man, you're blowing my head.

I had to reply. And I enjoyed my reply so much that, in lieu of other inspiration, I'll reproduce it here.

Oil speculators make money when the price goes down only if they knew in advance that it would, or just guessed well.

Personally, I don't believe that the average oil speculator right now knew anything in advance. It seems to have been a paradigm 'random walk' of late, both up and down. So the successful ones have been guessing right.

No ... I wouldn't want to be a speculator right now for the same reason that I don't spend a lot of time in casinos.

People who DO spend time in casinos are performing a socially useful function (somebody else will probably make better use of their money than they know how to do). Likewise, people who speculate on commodity prices are performing a socially useful function. They create a market in which other parties, commercial entities, can hedge against risks.

But I wouldn't want to be the one performing that function, no. When oil was above $140, the general guess was that it would keep going up, maybe to $200, before heading down in a big way. What [do you] believe has happened to any speculator who acted on that bit of wisdom?

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.