ABOUT STOCK RISK AND PROFESSIONALLY MANAGED FUTURESRobert Boshnack, Chairman, Vision LP In 1999, the NASDAQ enjoyed its best year ever, climbing 85%. But many investors failed to read between the lines, to wit, only 65 stocks out of 4,815 accounted for 99% of the NASDAQ’s gain, and almost half of all stocks within the index were down an average 32%! In 2000, there is no mistaking the numbers. Consider, for example, the one-day declines and percent changes in the following issues:
Prudent investors may wish to consider this: Better performing Commodity Trading Advisors (CTAs), like Max Ansbacher, have never experienced declines as acute as the 40%-plus free falls sustained in the stocks of many well-known, supposedly rock-solid companies. Bear in mind, past performance is not necessarily indicative of future results. The risk of loss exists in futures trading. Technically speaking, futures are riskier than stocks because of the greater leverage in futures and potential for unlimited risk. Over-leveraging a futures trading account without utilizing prudent money management, could result in potentially substantial losses or profits. In our opinion, that would constitute high stakes gambling, not investing. In over twenty years of observing traders and seeing many millions of dollars made and lost, we believe the unprofessional use of leverage and the lack of prudent money management are the culprits that can render futures riskier than stocks. Place futures in the hands of an accomplished CTA, and we strongly believe the risk in futures becomes no greater than with stocks. Bear in mind, the potential for unlimited risk in futures is present no matter who is managing your money. Truth be told, it’s not the investment vehicle that makes or loses money, but rather the individual or individuals managing it. Stocks and futures are both investment vehicles employed by money managers as a means of earning profits. Some managers succeed where others fail, regardless of the conveyance. Doesn’t it then stand to reason: It’s the money manager’s skills, abilities, and investment acumen that will determine investing results, not the investment vehicle? IRRATIONAL DECISION MAKING Sometimes investors can be highly irrational—at the wrong time! A broker related to us a conversation he had with an investor. The investor decided to buy a particular stock rather than invest with a particular CTA. (The CTA has an outstanding long-term track record that the investor admitted outperformed his previous investments.) When the broker asked why the investor chose the stock rather than the CTA, the investor responded that he felt investing with the CTA was too risky. When the broker then asked the investor the level at which he would liquidate his holdings if the stock dropped, the investor indicated a level which represented a 40% loss. In fact, that level was double the worst loss the CTA ever incurred! The broker then asked the investor to name an investment in his portfolio that could potentially capitalize on both bull and bear stock markets. The investor said he could not; he didn’t have any. We believe the investor not only failed to scrutinize the CTA based on the CTA’s individual accomplishments, but made no effort to distinguish between amateurs and professionals trading futures, nor did he even consider the need for portfolio diversification. Uninformed, emotional decision making is generally never wise, particularly when it comes to investing! Why, we ask, should money made or lost in stocks be assessed any differently than with futures? The answer is clear: There should be no difference.
Professionally managed futures can potentially be an extremely attractive, stand-alone investment, as well as an excellent means of diversifying a portfolio. We hope the opinions and thoughts presented in this report have put the risk in stocks and futures in proper perspective.
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