Page 59 - merged.pdf

•Five Greatest Ways of Winning in the Stock Market 39

Return on £1000 Average unit trust Belmont Difference
income reinvested Investment Club
1034 0.5%
One year 1272 1039 22.96%
Three years 1618 1564 11.06%
Five years 1797

We have not been immune to the huge bear market though and the value of our
investment has fallen dramatically. Time will tell if we can repeat this competitive
performance in hard times as well as good. I suspect we will.

Idea 26 – Hedge your bets

‘Here’s a farmer that hanged himself on the expectation of plenty.’
Shakespeare, Macbeth

You may remember the opening of the book by ex-Salomon trader Michael Wherever there
Lewis called Liar’s Poker. John Gutfreund, the Salomon Chairman, comes is a degree of
out of his office and offers to bet $1 million on a single game of Liar’s Poker uncertainty, for
with another senior manager. The bet goes ‘One hand, one million dollars,
no tears.’ The ‘no tears’ is to emphasise that the bet is for real and that the example of
loser will not whinge about his loss. Indeed, get a group of city types together supply and
and they will find something to bet on. Wherever there is a degree of uncer- demand,
tainty, for example of supply and demand, someone will take positions on it. someone will
take positions
The concept of hedging rears its head in the futures markets in which
on it.

‘bets’ are taken on the value of commodities or shares some time in the future. The

history of what is now known as the derivatives markets goes back to some very sensible

‘insurance policies’ being taken out by farmers. If you are dependent on crops that only

grow once a year, you are dependent first of all on the vagaries of demand. How much

cocoa will the chocolate manufactures buy and use over the next one or two years?

There is also risk to supply as it depends on what the weather is going to be like.