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Betting on the Market is a 50/50 Coin Toss

 

Betting on the Market is a 50/50 Coin Toss

Posted by Constellation on February 02, 2017

Are you ready for the Big Game?

As you get ready for this Sunday you may be placing bets on who will win. Some people measure each player based on their stats from this past season. Others stick to their hometown loyalties. No matter how you place your bets, in the end, we’re still looking at a 50/50 showdown.

Why?

This week, My Money Blog posted about Howard Marks’ observations of trends in professional football’s winning picks. He looked at the frequency with which professional forecasters were accurately placing bets on the winner of each game.

What he found was that in 2015, professional forecasters were right 50.9 percent of the time. The best forecaster was right 58.5 percent of the time. The worst forecaster was right 44.8 percent of the time. This past season, the numbers didn’t look much different. The best was right 55.1 percent of the time, while the worst was right 48.8 percent of the time.

These statistics include only professional football forecasters, but almost all of them fall no more than a 50/50 coin flip away from being right. Think again about who you’re rooting for this Sunday. Chances are you have the same odds as these experts who are paid to watch every game and monitor stats and player careers.

What does this have to do with energy?

Energy buyers, brokers, suppliers and experts do just the same thing. They analyze economic trends, monitor market activity and make forecasts based on past performance. In the end though, it comes down to the same 50/50 coin flip. Will the market go up (heads), or will it go down (tails)?

50/50: Because no one can predict what the market will do. No matter how much data we have or how much experience we have in the field, we only have an idea, but we never know for sure.

How do we work with this?

Trying to time the market can make budgeting, business planning and buying decisions a challenge. Have you ever watched the market line drop and thought, “Now feels like the right time,” or “I heard someone say it’s going to go down more…”?  All of the information and opinions floating around the market can make things confusing, ultimately leading us to close our eyes and flip a coin.

We know the market will continue to move up and down – we can say that for certain – so try using market fluctuation to your advantage.  Remove the emotion from your buying decision. Create specific buying criteria so that even if the market is random, the way you’re buying is consistent.

Take your November month of flow, for example. If you are consistently buying 10 percent of your volumes each month in advance, you take a defensible, mathematical approach to reducing risk and increasing budget certainty. For your boss, the CFO and other stakeholders, you can demonstrate a clean, straightforward purchasing structure that channels the market.

Think of it this way: Instead of betting all of your money on one coin flip, you bet on a series of coin flips. Then you can leverage the good flips to minimize the impact of bad flips. The average of wins and losses gets you to a stronger, more predictable result.

Natural gas and power purchasing strategies that let you buy small percentages of your volumes over time exist. They reduce the chance of hitting the market high, while taking advantage of market lows. Instead of betting 50/50, up or down on a year’s energy budget, use time diversification strategies to manage to the mean.  Over time, you smooth the curve, achieve more predictable results and reduce volatility risk.

So this Sunday afternoon, when you go to that football party, ask your friends who they think will win and why. Chances are you’ll get answers like, “I think this team is better,” or “I’m loyal to my hometown team,” or “I looked up the stats and I’m pretty sure this team will win in the end.” Just remember – everyone’s going by their gut feeling when it comes down to it.

Energy buying – especially for government, manufacturers, hospitals, and others – shouldn’t be left up to your gut feeling. We can’t help you with your bets on football games, but we’re here to help you build the right energy strategy for your business.

Contact us to learn more about our natural gas and power solutions.

Constellation

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