More on commodity buying, Black Swans and 300 yard slices…

We’re coming back to Bubba Watson, Betfair and commodity hedging today.

We gave the general warning yesterday that commodity trading is not for the faint hearted – like sports betting with anything other than a small amount of money! I started my career with Mars Confectionery, and the amount of money, effort and creativity that Mars put into Cocoa trading  - everything from advanced weather forecasting to analysing the political situation in cocoa growing countries – was extraordinary.

But it was worth it when your losses from cocoa trading, if you got it wrong, could wipe out your entire year’s profit, as Rowntree’s found in the ealry seventies. They went “short”, expecting prices to fall, but they didn’t. Then the market realised that Rowntree’s were vulnerable, which in itself pushed prices up further.. goodbye annual profit.

So I'm cautious! I have the occasional bet, only on things I think I know something about (sport involving humans, not animals, and music), and only with  small amounts of money for fun. But I do believe that long-odds events happen more often than the “market” thinks in golf.

I don’t bet regularly I should say, but a few weeks back, I bet on Brandt Snedecker (at about 25-1) to win a big US tournament when he was 4 shots behind with four to play. The leader, a rookie, came to the last hole, still four shots ahead, a par 4, went in the water, shot 8, and lost the play off to Snedecker!

Perhaps that fits with the Black Swan theories of Nassim Nicholas Taleb, who believes that markets have consistently under-estimated the probability of “outlier” events that basic statistics suggest are incredibly unlikely.  I’m sure his ideas have influenced commodity trading over the last few years, and it does strike me that strange things happen more often than people expect, not just in business, but in golf, and probably sport generally.

Taleb’s ideas really should be understood by anyone seriously involved with commodity buying and indeed supply chain risk more generally. He would suggest that risk events – such as natural disasters, as well as more man-made market crashes and failures – have occurred much more regularly than most historical and statistical model predicted. (It’s all down to incorrect assumptions about the statistical distributions underpinning random events, for you Maths fans...)

Certainly, we should put significant effort into thinking about events that have a very low probability, but would have very high consequences if they were to happen. Taleb’s theory means that if the real probability of an event is perhaps one in a hundred, rather than one in a thousand or less (as suggested by traditional modelling), then we should obviously pay a lot more attention to it.

So.. that got a bit heavy after starting with Betfair!

And just to finish – for golf fans only. Don’t think that Bubba’s shot in the play-off the other night was a fluke. He has a track record of playing amazing shots – just watch this. This is his second shot on one of the longest par 5 holes in the world - 663 yards. After hitting his drive 350 yards, he hits his second, with a Driver off the fairway, 305 yards to the green, including (deliberately) slicing it at least 50 yards right to left around the corner. Very special.

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