Because they have $3 trillion in assets under management - which is $600m a year even at 2 basis points in fees, which not everyone pays. Economies of scale ramp up quickly.
I see you're getting downvoted, but no one is bothering to explain.
First, the market in general works in the exact opposite way. You can invest a million dollars a lot of places; with enough luck and skill you'll earn a great return. Keep doing that and soon you'll have, say, 500 million.
But 500 million is harder to invest; you might say "stock X is really undervalued; I'm going to go long!", but if stock X has a market cap of 10 billion, you'll struggle to find 500 million in shares to purchase on a whim, and in so doing, you'll push the price up, and now it's no longer undervalued. Many investments that work for the guy with 1m don't work for the guy with 500m.
But if you keep going and keep being lucky (or skilled) you might end up with billions or hundreds of billions. Now you're basically fucked. Most possible investments don't have the liquidity or capacity to absorb the money you're trying to place. At this scale you aren't picking companies; you're picking industrial sectors or countries. You'll never make a great return like that. Plus you're being watched constantly; the merest rumour that you're about to invest will end prices soaring or crashing before you can move. You can "push the market around", but only in ways that benefit smaller, nimble players, not you. At that scale, your ability to be clever is basically nil.
Which brings us to the second point: Vanguard is an index fund. They simply buy an even mix of the shares that make up an index. Their entire strategy/promise is that they won't "push the market around" (which is the reason they have $3t under management; people explicitly looking for people who won't try and be clever).
So your question is "couldn't Vanguard do the one thing they don't do, because it can't work"? And the answer is no, it can't work, which is why Vanguard exists and has those assets.
Thanks for your comment. I didn't ask if an index fund could move the market, I asked if an investor with so much couldn't move the market.
One guy bought 15% of the world's cocoa and now chocolate prices are high and manufacturers are trying to rip off consumers by filling thick plastic packages with more air and less chocolate bar.
If you had control of that sort of money it just seems you could be invisible. The cost of the entire coffee production of the world is only billions, buy any significant percentage and there's going to be companies who'll either pay or collapse?
> I asked if an investor with so much couldn't move the market.
Well yeah. Start to buy Apple shares, and the price rises, and you pay more than a smaller investor would. Try to sell them again, and the price crashes, and you receive less than a smaller investor would. As I already explained, you've got it backwards.
> One guy bought 15% of the world's cocoa
Yes, years ago. And it was 7%, not 15%. And like pretty much every cornering scheme, it didn't work. Armajaro ended up in trouble when cocoa prices dropped while they were still holding a large inventory, and they had to sell their commodities trading division off just to cover their losses, because of the same dynamics: The only way they could buy 7% of the worlds yearly cocoa production was by paying a premium—and the only way they could get rid of it was by offering it as a discount.
> If you had control of that sort of money it just seems you could be invisible.
The exact opposite of invisible, actually.
> The cost of the entire coffee production of the world is only billions, buy any significant percentage and there's going to be companies who'll either pay or collapse?
I'm going to challenge you for sources on Armajaro - the cocoa price vastly increased following his scheme and his commodities trading business has won incredible gains.
The above FT story reports that the problem with the trade was that customers expected extended credit and despite a $55M for 6% investment the company, doing many other deals, went under; reported as a credit issue. They sold for $1 to another commodities trade company [Ecom Agroindustrial Trading], FT reports Amajaro Trading was valued at $200M-$300M in 2012. I'm skeptical as to whether Amajaro made a personal loss in any of that, whether it's possible that the price was artificially lowered to sell on a lot of commodities for $1 and avoid tax? Does that seem at all possible?
As a complete novice to the field, could you explain why it's not a good plan in general to seize large proportions of a commodity, for example in these two positions with an increasing price and a stable retail demand for the end products?
Armajaro trading arm bought something like 240,100 tonnes of cocoa for around £650 million, or ~£2,700 per tonne, in July 2010. They then sold the cocoa beans "later that year".
Unfortunately, July 2010 was the peak of the market (it's almost as if trying to buy 7% of global production drives prices up), and they were paying above the odds even then. And prices immediately tumbled off a cliff, dropping to a low of ~£1,8200 in November 2010 (it's almost as if trying to sell 7% of global production drives prices down!), before rallying briefly in 2011, then proceeding to briskly tumble to a low of ~£1,330 per tonne in 2012. (They've since recovered, but they've yet to break £2,000.)
So yeah, obviously Armajaro lost a bunch of money on that trade, precisely because of the volume they were working with. By actually taking delivery, they were relying on prices going up, but prices went down, right as they were needing to sell. Except that because they were buying and selling hundreds of millions of pounds of cocoa, they themselves were a leading cause of the markets moving against them. The same thing happened in other famous market corners, for example when the Hunt brothers tried corner the global silver market (and lost a staggering amount of money). It's no accident that there are no famous successful market corners.
> whether it's possible that the price was artificially lowered to sell on a lot of commodities for $1 and avoid tax? Does that seem at all possible?
Not following. If you're asking if it's possible if Anthony Ward sold a key part of his trading empire to a hated rival for $1 not because he'd lost a ton of money trading cocoa and the thing was basically worthless, but because he'd made a ton of money and it was actually hugely valuable? Then the answer is no, of course not.
> As a complete novice to the field, could you explain why it's not a good plan in general to seize large proportions of a commodity, for example in these two positions with an increasing price and a stable retail demand for the end products?
First, cocoa doesn't have a steadily increasing price, and while retail demand might be stable, the supply situation is very volatile due to political and economic instability in the growing regions. Cocoa prices were bouncing around like crazy, and while volatility is good for smart traders trying to make bets about price directions, it's bad for people trying to deal in the physical commodity, because what happens if you get stuck with 240 thousand tonnes of cocoa purchased when the price crashes?
Second, even if cocoa was a safe commodity with stable supply, demand, and price, you can't "seize large proportions of a commodity"; what you can do is start buying it. And the more you buy it, the less stable the price is going to be, because the demand is no longer stable due to some wannabe Bond villain is buying up huge amounts of it. The price will skyrocket. So when you ask:
> why it's not a good plan in general to seize large proportions of a commodity
Because you'll pay a large premium over the fundamental market price. Like, by definition. And buying anything for a large premium over the market price is never a good idea, unless you value it well over the market price. But Armajaro wasn't a producer; all they could do with the cocoa is sell it. Which, inevitably, they'll do at some discount to the market price. Nor would this trade have made sense if Armajaro had known that prices were going to spike due to an external shock; then they should have bought options, not actual physical cocoa.
Bottom line: Buying very large amounts of a physical commodity in order to profit from price movements is a terrible idea.
Edit: The largest purchase of cocoa ever was done in 1996 by...Anthony Ward, working for Phibro at the time. He bought 300,000 tonnes, but Phibro lost money on the deal when prices moved against him. Shocking! Although he is reported to have made money on his 2002 trade. Then again, the 2002 trade was only 5% of the market, or 200,000 tonnes, smaller than the other two. (The Guardian says 15%, but you can't trust the Guardian with numbers, and multiple other reports confirm the lower figure.) Or in other words, Ward has demonstrated the ability to make money on small trades, but lose them on bigger ones.
Thanks for your insight and continued patient responses.
>"Armajaro trading arm bought something like 240,100 tonnes of cocoa for around £650 million, or ~£2,700 per tonne, in July 2010." (Lazare) //
>"Then the answer is no, of course not." (ibid) //
The ICCO [1] has an interesting section at paragraph 31 on page 10 where it discusses this tonnage [at arms length] and says a group of interested parties made appeals that unfair trading was attempting to manipulate the futures market. This suggests that those companies were thinking something along the lines of what I was suggesting: that this purchase was trying to manipulate prices, so the money made would not be from the trade directly.
>"[...] This price development on the London market led 16 cocoa companies and trade associations to send a letter to NYSE Liffe to complain that “a manipulation of the contract” was “bringing the London market into disrepute”. Many market commentators argued that this
backwardation was fuelled by a squeeze, which is a trader or a group of traders deliberately disrupting the supply of physical cocoa to artificially increase the price of cocoa futures contracts which are about to expire, and hence to profit from it while other traders find themselves struggling to fulfil their obligations. In response to this allegation, NYSE Liffe advised that it did not find any evidence of
abusive trading behaviour on the cocoa market." (ICCO report [1]) //
You said the price "tumbled off a cliff, dropping to a low of ~£1,8200 in November 2010". According to the chart you linked a tonne of cocoa averaged [?] £2.11k [in London?] in July 2010 when Amajaro made the trade. So why would companies be complaining about backwardation then? [2] Says the price was pushed up and rose by 0.7% after the purchase.
Presumably then those with warehoused stock that's accessible can undercut Amajaro in order to bring down the price? But if there are sufficient goods for this then the "other traders find themselves struggling to fulfil their obligations" from [1] makes no sense.
Also seemingly there was a major issue with Ivory Coast [aka Cote d'Ivoire] being under a flood warning, that previous years had returned deficits in terms of the global demand vs. the global harvest. Was this the issue that broke Ward: There were various embargoes and shenanigans around the Ivory Coast's presidential elections and when they eventually shipped the harvest proved excellent and there were massive excesses [1].
>So yeah, obviously Armajaro lost a bunch of money on that trade, precisely because of the volume they were working with. //
Looks like a top estimate for that is -£72M based on the July to November price change for 240k tonnes.
>* Nor would this trade have made sense if Armajaro had known that prices were going to spike due to an external shock; then they should have bought options, not actual physical cocoa.* //
Correct me if I'm wrong but you can't corner the market that way because the seller can default; moreover a future glut can come in and wipe out your position and/or movement of goods can alleviate the local shortfall [it's something like 3-4 weeks to ship cocoa from US warehouses to European buyers]. Thus it wouldn't create a clamour in the market to ensure that delivery of the commodity can continue, as was apparently the case here?
- - -
Couple of figures that are pertinent:
* Re your edit [3] puts a figure of £40M on the 2002 trade, Wikipedia reports a £58M gain.
* Ward's CC+ fund made 15% in 2010, not exactly sure how much that is but it seems to have been £25M based on some other figures (all Amajaro funds passing £1B, CC+ being 20%, working backwards from [4]).
However there are strategies available to active investors with billions - being an "activist investor".
If you buy significant stakes in companies - which might be only a percentage point or two, but still putting you in the top individual shareholders, then you have the ability to change the strategy of the company.
The step up from that is into Berkshire Hathaway / private equity territory where you just buy companies, or very significant stakes and run them as you want to.
Vanguard has an interesting ownership structure where the funds own the Vanguard company. They're basically (but not "officially" as far as I can tell) a non-profit, and that's why their fees tend to be the lowest.
