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Groking the Coffee Market

Updated: Aug 23, 2023

When I was a very green commodity analyst, my boss said something to me that I will never forget.

I was being trained up on the job at the #hedgefund, and I was tasked with creating a market report for the #coffeemarket. I had been a #coffeetrader for several years at this point, so I figured that it would be an easy transition to being an analyst. I was wrong.

My boss was an experienced #commoditytrader who traded many #commodities and had worked with numerous analysts over the years, and he was frustrated by my amateurish efforts at producing useful reports. Afte reviewing the #coffee market report that I had put together, he said, “Ryan, I feel like you are just putting a bunch of charts into a presentation with no understanding of what they mean.”

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Of course, I was indignant, “these are #exports”, “these are #inventory levels” I told him.

“But what does that mean?” he asked.

“Well, it's how much coffee was exported from the countries.” I said.

“But what does that mean?” he said.

I stammered an answer, but the point stuck with me. He was saying that I didn’t “grok” the information.

In our line of work, there is a lot of money, businesses and livelihoods that depend on the views of #traders and #analysts. Because of these high stakes, you should never share information that you don’t understand, or even worse, offer an uninformed opinion.

Experienced traders learn quickly to separate reports that are fact dumps vs reports that “grok” the data and draw conclusions. This is why certain reports jump out to us as low value and others are highly sought after. The low-value authors just regurgitate datapoints with little understanding of what they mean or how they connect. The high value reports demonstrate command of the underlying information.

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The term “grok” has been used in the programming community since at least the 1980s. A programmer can learn a new function or even a programming language by reading a book. But they haven’t “grok”ed the information until they have used the new material in context on multiple occasions and it becomes intuitive.

Now, if you are new to coffee or commodities, I offer you the advice I would have given my green, new-to-analysis self from 10 years ago: just because you don’t grok a term doesn’t mean you should ignore it or never use it. Instead, the fact that it is unfamiliar to you should highlight that you need to pay attention to it. I recommend doing two things:

1) Slow down and study it in detail until you understand it.

The first step is to develop a detached, theoretical, academic understanding. However, reading about the concept and thinking about it in abstract terms will start to create connections in your mind about it.

When studying the #COT for example, I found it very confusing at first, so I had to close my eyes and think about each of the components in isolation and try to understand what the boundaries of each participant was.

2) Ask questions about it to people who are experts.

This has to come after part 1.

Experts generally don’t like to be asked basic questions, it implies a laziness and a disinterest on your part. It is as if you haven’t done any research and want someone else to do the research for you.

“What is the COT?” is a bad question. “How can I use the COT?” is not much better. These are easily searched online and are questions that experts are bored of answering.

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A better question is to think about a conclusion and ask if it is correct. “Am I correct in thinking that because the managed money position is very long, there is a high risk of liquidation?” This is a much better question and will generate a more thoughtful response from an expert.

Once you have done one and two, you can start to use the concepts and data cautiously without claiming to be an expert.

You can say things like, “my understanding is that low managed money short position means that there is low potential for short covering rallies, so any rallying will have to come from new longs.” It may not be correct, but you have outlined your logic and it implicitly invites discussion if people disagree with your understanding.

Something magic happens when you do research, speak to experts, and cautiously participate. You build connections in your mind, you deepen your understanding, and you begin to “grok” the information.

Building expertise in an entire field takes a long time and a lot of work, but it is only a small investment to tackle a single concept, be it a simple report or a datapoint.

This investment pays off quickly if you focus on the concepts that repeatedly come up in your field. More importantly, they build on each other. As you grok one concept, you will more quickly grok others. As frameworks often hold true across multiple related fields.

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Years later, data points like exports and inventory levels have become essential parts of my analysis. But I had to grok them individually and speak with many experts in order to build that intelligently into my daily work.

Albert Einstein once said that compound interest is the most powerful force in the universe, and I don’t think he was talking solely about money. When we invest in understanding the world around us, that investment compounds quickly. We take in the datapoints around us, and as we grok those, we are able broaden our reach and deepen our understanding beyond the immediate.

This is really what coffee trading or commodity trading is all about. It is why trading consistently profitable is so elusive to amateurs. The world is complex, and the fast-paced, high-stakes trading world is especially so. In order to act and react in this environment, a lot of the basics have to be intuitive. You have to grok them. And this frees up your mind for higher order, strategic thinking.

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