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What We Can Learn From Goldman Sachs' Commodities Failures

By Ellen R. Wald, Ph.D.CommoditiesAug 23, 2017 10:10AM ET
www.investing.com/analysis/what-the-we-can-learn-from-goldman-sachs-commodities-failures-200208901
What We Can Learn From Goldman Sachs' Commodities Failures
By Ellen R. Wald, Ph.D.   |  Aug 23, 2017 10:10AM ET
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Eventually, everyone faces losses in the commodities markets. Even the formidable Goldman Sachs (NYSE:GS) is facing some humility, with continued poor performances in commodities trading. It was recently revealed that the famed investment bank lost $100 million on a bad bet on natural gas prices in Q2. Other recent commodities investments have done poorly as well, leading to the worst quarter in 73 periods. Now Goldman Sachs is embarking on a few changes which offer useful lessons for other institutions and individual investors.

Bloomberg reports that Goldman believes its commodities trading unit has faced problems because it has failed to replace senior and top talent during a cost-cutting period. According to the theory, the group, which consists of approximately 180 people, is in need of an influx of exceptional ability. However, there is a flaw in this argument. The existing dozens of traders and analysts in the unit are presumably capable as well. After all, they did land desirable jobs at Goldman. Moreover, there is a strong argument that there is no such thing as an exceptional investor, no matter what the industry wants to believe.

Daniel Kahneman, the famous behavioral psychologist and Nobel Prize winner for economics, has shown that the concept of talent in investing is likely faulty. There are certain traits that may benefit an investor, such as “emotional discipline” and perhaps humility, but there is likely no way for an employer to identify a particularly talented investor. (For more from Kahneman about the human mind, intuition, and logic, see his exceptional book, “Thinking, Fast and Slow”). By this reasoning, there is no way for Goldman to simply hire exceptional investing talent.

However, there are two ways for an investor to improve his bets. The first is to do the research and the second is to analyze that information correctly. It is vital to obtain the right information and to understand what it means. As Bloomberg reports, Goldman is hoping to be more successful taking advantage of its relationship with “more-than 1,500 natural-resources clients.” That is a great way to get better information and to help traders assess that information correctly, and a useful way to use the size and influence of Goldman Sachs to profit off of information. In other words, Goldman is going to tap into its network of knowledgeable clients to obtain the best information and, presumably, help the bank understand what it means.

Many individual commodities traders are industry people themselves. Whether they are farmers hedging on their crop or they are oilmen monetizing their intimate knowledge of the business for their own profit, good information and knowing how to analyze that information are the keys to successful investing, especially in commodities. Investing without information is just gambling, and you might as well go to Monte Carlo, Macau, or Las Vegas.

Oil Returning To Its Busy Self As Summer Winds Down

The summer is ending, and the markets are generally slow. The events of the last week – a minor oil leak from Kuwaiti facilities in the Persian Gulf, gasoline price spikes in some parts of the U.S. due to increased driving to see the solar eclipse, lower rig-counts in the U.S., and the announcement of Rosneft’s purchase of a large Indian refinery – have not significantly moved the price of crude oil or the value of international oil companies. The summer will soon be over and the market will return to its busy self.

What We Can Learn From Goldman Sachs' Commodities Failures
 
What We Can Learn From Goldman Sachs' Commodities Failures

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Do Deikins
DoRight Aug 23, 2017 11:20PM ET
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Sounds more like an organizational error for GS, with fear and greed being thrown in for good measure.  I.e. Hiring, then firing the wrong people.  As old farmers are wont to say, "The best fertilizer is the footsteps of the farmer."  You gotta get out among 'em.  And as the great Yogi Berra would say, "In theory there is no difference between theory and practice. In practice there is."  So GS go ahead and fire those who just got started on their true education.  Some one else will be glad to snap 'em up.
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Quân Nguyễn
Quân Nguyễn Aug 23, 2017 11:20PM ET
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Your words are very good, very thankful
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