Is Now the Time to Buy? - Let's Consider the Question

September 2009

• Is now the time to buy? The question implies a strategy based on market view and timing.
• A buying strategy that depends on locking in "at the right time" to save money is likely to be ineffective, and can even be dangerous.
• Fixing price is a tool for risk management, not a tool for cost savings.

Natural gas prices have fallen dramatically in the past 12 to15 months, reaching seven-year lows in early September for the near-month futures contract on the New York Mercantile Exchange. With prices so low, is now the time to buy?

Instead of spending a lot of time trying to decide the right answer to that question, let's step back and realize... it's the wrong question!

The question implies that the buyer's strategy is based on market view and market timing. While everyone wants to save money, a buying strategy that depends on locking in "at the right time" as the means to save money is likely to be ineffective, and can even be dangerous. It is very difficult to consistently anticipate the market so that the right move is made time and time again, over the long-term.

Consider a report recently issued by Standard & Poors and reported by the Globe and Mail that examined mutual funds. While commodity markets and equity markets are not identical, clearly there are a lot of common characteristics. The report indicated that active fund managers (who take positions they think will outperform the market) beat the benchmark index only 16.7% of the time over a three-year horizon, and only 7.6% of the time over a five-year horizon.

Over a one-year period, just over half - 54.6% - beat the benchmark.

This suggests that, whether one gets it right in the short-term as a result of good analysis or just good luck, it is hard to be either good or lucky again and again and again over time.

So, how do you save money on commodity costs? Well, again, what does financial research tell us? A paper published in 2001 by Prof. Moshe Milevsky of the Schulich School of Business at York University looked at the question of whether to float or fix mortgage interest rates. The conclusion? Based on data from 1950 to 2000, there was a 76% to 90% probability of saving money by floating instead of locking in a five-year fixed rate mortgage.

Prof. Milevsky notes: "Long-term stability has its price!"

Taken together, these studies emphasize a strong message for those exposed to volatile financial markets, be they equity markets, interest rates, and commodity markets. Fixing price is a tool for risk management, not a tool for cost savings. The only way to consistently save money by fixing prices is to be able to consistently foresee market movements. And the research indicates that not even experts can do that.

Locking in prices to achieve stability involves a likely cost premium, so do it only to the extent necessary to contain your risk within acceptable levels.

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