Self-Deceit: Several weeks ago my column featured some recent comments by Howard Marks, Oaktree Capital (Mr. Market Miscalculates). He notes that one of the key sources of miscalculation is our inherent tendency towards wishful thinking (i.e. what the market will be). His commentary includes a quote from Demosthenes and one of Charlie Munger’s favorite phrases to repeat as it relates to investing: “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.”
The column also highlighted some discussion about a backgrounder who, based on an email I received, was selling his calves, “because the futures made no sense to [him].” But Mr. Backgrounder was NOT a risk manager – he was a wishful thinker.
He was hoping the market would perpetually work higher, and thus believed it to be true. Alas, when that didn’t occur, it must be someone’s fault. The email I received claimed the culprit must be speculators and subsequent dysfunction at the CME.
But Mr. Backgrounder is, in fact, a speculator himself. I explained that “he’s long the physical market in hopes of profiting from market fluctuations (the very definition of a speculator). He’s betting on the come and a willing participant in bearing that risk.”
Risk Management: The point being, it’s impossible to accurately forecast everything that’s going to happen (no matter how much you may think you know). Markets ebb and flow. And sometimes they’re just downright awful. Financial historian Peter Bernstein reminds us that, ”…history tells us over and over again that the unexpected and the unthinkable are the norm, not an anomaly.”
With that in mind, I noted in Drovers State of the Beef Industry (SOBI) there’s been lots of media coverage on Livestock Risk Protection (LRP) over the past several years. Accordingly, awareness is building among producers. For example, 77% of SOBI respondents indicated they were familiar with LRP – and one-fourth use the program and almost half are considering doing so.
However, the remaining quarter of respondents indicate they “have no intention participating in the next year.” It’s also interesting to note those responses line up with herd size. That is, the average herd size of those using the program was 345 head. The other two categories (considering and no intention, respectively) represent operations with 307 and 229 head, respectively.
IF you’re part of that cut that’s considering LRP, it’s not too early to begin thinking about next year’s calf crop. LRP is an especially easy (not to mention subsidized) means by which to introduce risk management to your operation if you’re not familiar with futures and/or options.
Value At Risk: What’s the upshot to all of this discussion? Namely, things that never happen, happen all the time. Producers should constantly be prepared for the unexpected and unthinkable – that’s especially true given there’s more value at risk than ever in the business.
One of my favorite quotes about risk comes from Lauren Child – author of the Clarice Bean children’s books (perhaps my daughter’s favorite character when she was small). A line from one of her books has stuck with me after many years: “Always remember: it’s the worry you haven’t thought to worry about that should worry you the most.”
That’s why risk management is essential: better to have it and not need it, than need it and not have it.
Nevil Speer is an independent consultant based in Bowling Green, KY. The views and opinions expressed herein do not reflect, nor are associated with in any manner, any client or business relationship. He can be reached at nevil.speer@turkeytrack.biz.
