Don’t ever invest in sardines (but it’s okay to trade them)

I want to tell the story about sardines. I am not the first to tell this story. Many “big” traders and investors have written about these sardines. The story has travelled through financial markets for many years and its exact origins are not entirely known. The story, as it’s been told to me, goes like this:

A small fishing town sits off the Pacific Coast where cool air blows and cold waves crash. You can hear the waves from a mile away and if you’re lucky, you will sometimes spot seals laying on the beach. The cold waters are perfect for all kinds of animals. But nothing thrives more in these waters than sardines. If you go far enough out into the ocean, all you will see is boats with their sails high and their fish nets cast. The fisherman in these oceans have been catching sardines for years. Between their fishing nets and all the seals on the beach, the sardine population has started to run low.

Deep in a Chicago trading pit, a commodity trader hears a strange rumor about sardines. It’s a first, too. He never hears rumors about sardines. This rumor has travelled across the country from a guy who drives a blue truck to another guy who works at fish store called “Fresh Fish and Salmon” to another guy who serves beer at a bar, and another who makes top hats. I’m not joking – the rumor made it to the top hat guy. The rumor says there’s a sardine shortage in a small fishing town off the Pacific Coast. The town with the seals on the beach. The one that catches all the sardines.

The commodity trader rushes to his desk where he immediately checks the price history of sardines. He studies the chart and sees a pattern developing, one that he’s seen many times before, the kind that just might confirm such a rumor. He puts on his coat and heads to the local fish market. The workers at the fish market tell him “You know, now that you ask, we’ve had a hard time getting sardines lately.” The next day the commodity trader bids up the price of sardines with everything he’s got. There’s a shortage, and he’s going to corner it.

The price of sardines spikes.

And they spike even more.

The soaring price of sardines makes headlines. Paper boys on the corners of big cities yell “Sardine shortage! Sardine shortage! Read all about it.”

Weeks go by and the price of sardines continues to rise. An investor, one who has enjoyed the run up because he got in early, before the paper boys were yelling about the shortage of sardines, is thrilled to see how high prices have gone. “I am wealthy now,” he thinks. “I should treat myself.”

He heads to his secret sardine storage facility hidden in the floor boards of his basement. He picks up a single tin can of sardines from his stash and dusts it off. He cracks open the can. He takes a few sardines out and eats them right there. They taste terrible. A few hours later, and he’s sick. Really sick. He calls his broker, the one who helped him get the sardines in the first place, and he explains to him what’s happened.

“The sardines have gone bad” he says over the phone, “the sardines have made me sick.”

“You don’t understand” the broker says, “Those are not eating sardines, they are trading sardines.”

That’s the story, passed down through trading circles for years. The exact origins, I don’t know, but I hope you enjoyed it. You might be asking why I decided to write that down at this moment. Well, if you’ve been following me, you know my ebbs and flows of markets. This story is something that I’ve been thinking about lately with such an epic rise in markets. There is a time for trading and there is a time for investing. The market today, in my view, is one for ripe for trading. There are a lot of sardines in this market that should only be traded, not invested. What I am saying is, don’t get caught investing in sardines that were meant only for trading.

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