Good morning. That is not just a greeting; it is a statement about my mood or attitude. Why is my attitude positive today? I am relatively healthy. I have adequate resources to meet basic needs. Family and friends around me are free of serious challenges. We are having beautiful weather. Etc., etc., …. Will I have a positive attitude several days in the future? I hope so. Why would my attitude be less positive in the future than today? If some of those factors changed to the negative side. Gather the list of positive factors together, associate each factor with my attitude in an absolute relationship, predict the changes in the factors, and you can predict my mood or attitude in the future with reasonable accuracy. I am a reasonably complex person who responds to big factors as well as small factors, and the list of what could effect my attitude gets pretty long pretty fast so it is difficult to predict my attitude a week, a month, or a year down the road.
Make a few edits, and I am talking about whether the market will be up or down a week, a month, or a year down the road. Most folks would say it would be difficult, if not impossible, to predict my attitude but take the same approach to try to predict the future markets too decide whether to make a sell or hold decision today. As said many times by many experienced analysts, the farther out you try to predict an outcome, the longer the list of factors gets effecting the outcome and the more likely the risk of a wrong assessment goes up.
Like buying or selling assets, you have the most power and strength when you enter a contract and substantially less when you exit. The same is true with entering and exiting a market position. The reason making marketing decisions appears so difficult is because outside forces help scramble your mind, so you get confused about what you are trying to do. If you are trying to capture something in the future that you can’t see clearly today, you have to deal with a list of factors beyond the analytical ability of most folks. What happens? The decision maker drops back to a few factors that seem most relevant at the time, and success rides on having picked the right major factors and having the right cause and effect relationship between factors and outcome.
Let’s bore in on the purpose for forward pricing decisions. The primary purpose is to transfer risk to a third party when the value of the asset/inventory is going to go down. If that is successful, it will simultaneously maximize the revenue for the ultimate sale of the inventory. There are methods like locking in carry that will guarantee receiving a higher price but not necessarily the highest revenue for the inventory because the risk may change and create an even greater net price if managed correctly. Beyond the carry, the next target of many is basis improvement based primarily on seasonal patterns, but this crosses over into trying to predict where the market will be at a future point, as do many other strategies.
As I said “forces help scramble your mind so you get confused about what you are trying to do.” Are you trying to lock in a price when market risk turns down or are you trying to outguess the market by capturing a specific price? Are you selling or are you marketing? If your goal is to transfer risk when it is happening, then focus needs to be on what the current market is doing, not what the market will be doing weeks or months down the road. Making marketing easier is as simple as understanding that your entry into a position is the most important decision you make, not the hoped exit. And, the huge difference is that you only need to get one factor right to know if the market risk is up, down, or turning. Even better, the assessment of market risk can be programmed into an algo so the same decision function can be used every day, every contract, and every year. It follows that in addition to an objective decision criteria, the decision rule can be backtested over multiple years of data and conditions to verify how effective it is when benchmarked against some standards of performance.
There you have it. I attempted to cut through the trash and explain how to simplify and improve marketing performance without one mention of any particular system or set of decision rules. Multiple strategies will accomplish the decision task, but deviations of performance between strategies may be nearly as volatile as the market itself. Don’t jump without proof there is water in the pool.
Posted by Keith D. Rogers, 14 December 2022
