Remember when oil prices went negative a few weeks ago? How is that even possible?
I mean I get it now, but I couldn’t have comprehended it before the event.
Below is a short extract from a story I read this week in Bloomberg News on how it played out for one person. It might make you wince:
“Syed Shah usually buys and sells stocks and currencies through his Interactive Brokers account, but he couldn’t resist trying his hand at some oil trading on April 20, the day prices plunged below zero for the first time ever. The day trader, working from his house in a Toronto suburb, figured he couldn’t lose as he spent $2,400 snapping up crude at $3.30 a barrel, and then 50 cents. Then came what looked like the deal of a lifetime: buying 212 futures contracts on West Texas Intermediate for an astonishing penny each.
What he didn’t know was oil’s first trip into negative pricing had broken Interactive Brokers Group. Its software couldn’t cope with that pesky minus sign, even though it was always technically possible — though this was an outlandish idea before the pandemic — for the crude market to go upside down. Crude was actually around negative $3.70 a barrel when Shah’s screen had it at 1 cent. Interactive Brokers never displayed a sub-zero price to him as oil kept diving to end the day at minus $37.63 a barrel.
At midnight, Shah got the devastating news: he owed Interactive Brokers $9 million. He’d started the day with $77,000 in his account.”
He owed them $9 million!!!!
Holy moly! Imagine opening that message?!
Now, I know this is an extreme case together with a software error, but it’s an example of someone getting tangled up in something they really didn’t know enough about.
Their actual knowledge was far less than their perceived knowledge, which consequently made them oblivious to the possible outcomes. And there was no one there to stop them.
“A penny a contract. How can I lose?”
Finance can appear straightforward sometimes, so many people question their need for professional help. But here’s the thing, which I know I’ve said before:
“There are some things we don’t know that we don’t know.”
The possibility of negative oil prices being the example above, but more commonly I see smart people completely unaware of complex and potentially costly pension or estate planning legislation. They pull one lever not realising that another one moves somewhere else.
So what is my general advice?
In modern parlance ‘Stay in your lane’.
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