What are “headwinds” and “tailwinds” in financial investments?
"The term ""tailwinds"" describes some condition or situation that will help move growth higher. For example, falling gas prices will help a delivery company be more profitable. Lower gas prices is said to be a tailwind for the freight services industry. ""Headwinds"" are just the opposite. Its a situation what will make growth more difficult. For example, if the price of beef goes much higher, McDonald's is facing headwinds. It's a nautical term. If the wind is at your back (tailwind), that will help you move forward more quickly. If you are moving into a headwind, that will only make progress more difficult." Headwinds in an economic situation represent events or conditions e.g. a credit crisis, rising costs, natural disasters, etc, that slow down the growth of an economy. So headwinds are negative. Tailwinds are the opposite and help to increase growth of an economy.
I used to trade power for a closed end hedge fund.   Yes, weather derivatives are very important.  They help power traders / utilities hedge for unaccountable variables, IE weather.  For example, lets say it costs a utility $50 an hour to produce power for the load when it is 80 degrees outside.  Lets say I trade the contract with them to guarantee the weather will be under 80 degrees.  If the weather is higher than 80 degrees, more people turn in their AC, the load on the grid goes up, and the utility has to start generating power at $70 an hour.    Under this contract, I would be liable to pay the utility the net difference in their cost (the additional $20 per hour they generate per mw).  In that case I am a loser.  If the power comes in under 80 degrees, I make money as I priced (sold) the contract at a premium according to the risk I calulated for offereing the contract.  This has many many applications, but yes, its not a weird thing to trade.  Hope this helps. The point of derivatives is to get rid of the risk you don't want so you can acquire exposure only to the risk you want. Who wants weather/temperature risk -- speculators. Who doesn't want that risk? Anyone who's core business is adversely affected by bad weather. It's the same reason multinational firms will hedge FX and interest rates. All a speculator is typically doing is taking the other side of the trade based on what they feel is the true price of the risk they are assuming "https://www.fool.com/investing/general/2013/07/30/2-types-of-risk-2-types-of-bubbles.aspx (mirror): The Wall Street Journal reviews: What Mr. Bernstein calls ""shallow risk"" is a temporary drop in an asset's market price; decades ago, the great investment analyst Benjamin Graham referred to such an interim decline as ""quotational loss."" ""Deep risk,"" on the other hand, is an irretrievable real loss of capital, meaning that after inflation you won't recover for decades -- if ever. So quotational loss = loss not explained by change of actual value of a firm." Mostly some custom work i've done myself, bayesian and time series models, but there is some pattern matching. Most TA functions such as MA's, MACD's, BollingerBands, are simple ways of doing time series analysis.  MA's are basic filters.  MACD is essentially a way of viewing acceleration, as its the informational difference between filters.  BB's are mean reverters based on standard deviation/  RSI is a ratio of filtered up to down moves basically generating an indicator based on how strong the market has moved. Thanks for that, it did help.   I think my issue is I don't work in finance itself, I'm a lawyer, and 'capital' generally has a very specific meaning in English company law, where it refers exclusively to shareholder capital.   I realise capital in finance terms includes both debt and equity investment. In your other question about these funds you quoted two very different yields for them. That pretty clearly says they are NOT tracking the same index. "Well there are a few comments that need to be made here I suppose. Though at work now so this will be short.   First there is the difference between banking, which indeed mostly looks at capital adequacy ratios and uses VaR as one of the methods to get to the risk-weighted assets. Then there is the buy side which is more interested in ""how much would I stand to lose in portfolio X if markets head south, and how does that relate to what a have promised my client?"" In the first situation it is the bank itself taking on the risk, in the second the risk lies entirely with the client. An asset manager could lose 100% on your regular old equity mandate and it wouldn't hit him except for loss in fees, whereas a significant trading loss for a bank can put it out of business..   My personal view is that all of these metrics are merely useful instruments and for a large part they all tell me the same thing. A higher duration on a fixed income mandate will give a higher VaR, a higher shortfall, more negative results on rates stress scenarios etcetera. They only really become useful when imposing limits on them, or using them to steer based on whatever the prevailing risk appetite is at a certain point in time. Or when looking at trends, or relative risk of portfolio A vs B  Don't get me wrong, I too can debate for hours about VaR parameters. Confidence intervals, look back periods, return frequency, decay factors, parametric or historical / monte carlo simulation, etcetera. But I think in practise that is really of limited use. If you take any ex ante risk measure and you thoroughly understand it, make an informed choice about risk appetite and steer on it, you basically have done your job as a risk manager.  Sorry I know I am not answering your questions in a structured way but am on my phone so it's hard to keep overview. PM me if you want to discuss things in detail." For a time period as short as a matter of months, commercial paper or bonds about to mature are the highest returning investments, as defined by Benjamin Graham:  An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative. There are no well-known methods that can be applied to cryptocurrencies or forex for such short time periods to promise safety of principal. The problem is that with $1,500, it will be impossible to buy any worthy credit directly and hold to maturity; besides, the need for liquidity eats up the return, risk-adjusted.  The only alternative is a bond ETF which has a high probability of getting crushed as interest rates continue to rise, so that fails the above criteria. The only alternative for investment now is a short term deposit with a bank. For speculation, anything goes... The best strategy is to take the money and continue to build up a financial structure: saving for risk-adjusted and time-discounted future annual cash flows.  After the average unemployment cycle is funded, approximately six or so years, then long-term investments should be accumulated, internationally diversified equities. I think you may be confused on terminology here. Financial leverage is debt that you have taken on, in order to invest. It increases your returns, because it allows you to invest with more money than what you actually own.  Example: If a $1,000 mutual fund investment returns $60 [6%], then you could also take on $1,000 of debt at 3% interest, and earn $120 from both mutual fund investments, paying $30 in interest, leaving you with a net $90 [9% of your initial $1,000]. However, if the mutual fund 'takes a nose dive', and loses money, you still need to pay the $30 interest. In this way, using financial leverage actually increases your risk. It may provide higher returns, but you have the risk of losing more than just your initial principle amount. In the example above, imagine if the mutual fund you owned collapsed, and was worth nothing. Now, you would have lost $1,000 from the money you invested in the first place, and you would also still owe $1,000 to the bank. The key take away is that 'no risk' and 'high returns' do not go together. Safe returns right now are hovering around 0% interest rates. If you ever feel you have concocted a mix of options that leaves you with no risk and high returns, check your math again. As an addendum, if instead what you plan on doing is investing, say, 90% of your money in safe(r) money-market type funds, and 10% in the stock market, then this is a good way to reduce your risk. However, it also reduces your returns, as only a small portion of your portfolio will realize the (typically higher) gains of the stock market. Once again, being safer with your investments leads to less return. That is not necessarily a bad thing; in fact investing some part of your portfolio in interest-earning low risk investments is often advised. 99% is basically the same as 100%, however, so you almost don't benefit at all by investing that 1% in the stock market. I use two measures to define investment risk: What's the longest period of time over which this investment has had negative returns? What's the worst-case fall in the value of this investment (peak to trough)? I find that the former works best for long-term investments, like retirement. As a concrete example, I have most of my retirement money in equity, since the Sensex has had zero returns over as long as a decade. Since my investment time-frame is longer, equity is risk-free, by this measure. For short-term investments, like money put aside to buy a car next year, the second measure works better. For this purpose, I might choose a debt fund that isn't the safest, and has had a worst-case 8% loss over the past decade. I can afford that loss, putting in more money from my pocket to buy the car, if needed. So, I might choose this fund for this purpose, taking a slight risk to earn higher return. In any case, how much money I need for a car can only be a rough guess, so having 8% less than originally planned may turn out to be enough. Or it may turn out that the entire amount originally planned for is insufficient, in which case a further 8% shortfall may not be a big deal. These two measures I've defined are simple to explain and understand, unlike academic stuff like beta, standard deviation, information ratio or other mumbo-jumbo. And they are simple to apply to a practical problem, as I've illustrated with the two examples above. On the other hand, if someone tells me that the standard deviation of a mutual fund is 15%, I'll have no idea what that means, or how to apply that to my financial situation. All this suffers from the problem of being limited to historical data, and the future may not be like the past. But that affects any risk statistic, and you can't do better unless you have a time machine. From Wikipedia: Investment has different meanings in finance and economics. In Finance   investment is putting money into something with the expectation of   gain, that upon thorough analysis, has a high degree of security for   the principal amount, as well as security of return, within an   expected period of time. In contrast putting money into something with   an expectation of gain without thorough analysis, without security of   principal, and without security of return is speculation or gambling. The second part of the question can be addressed by analyzing the change in gold price vs inflation year by year over the long term. As Chuck mentioned, there are periods in which it didn't exceed inflation. More important, over any sufficiently long length of time the US stock market will outperform. Those who bought at the '87 peak aren't doing too bad, yet those who bought in the last gold bubble haven't kept up with inflation. $850 put into gold at the '80 top would inflate today to $2220 per the inflation calculator. You can find with a bit of charting some periods where gold outpaced inflation, and some where it missed. Back to the definition of investment. I think gold fits speculation far better than it does investment. I've heard the word used in ways I'd disagree with, spend what you will on the shoes, but no, they aren't an investment, I tell my wife. The treadmill purchase may improve my health, and people may use the word colloquially, but it's not an investment. "I'd argue the two words ought to (in that I see this as a helpful distinction) describe different activities:   ""Investing"":  spending one's money in order to own something of value.  This could be equipment (widgets, as you wrote), shares in a company, antiques, land, etc.  It is fundamentally an act of buying. ""Speculating"":  a mental process in which one attempts to ascertain the future value of some good.  Speculation is fundamentally an act of attempted predicting.   Under this set of definitions, one can invest without speculating (CDs...no need for prediction) and speculate without investing (virtual investing).  In reality, though, the two often go together.  The sorts of investments you describe are speculative, that is, they are done with some prediction in mind of future value.   The degree of ""speculativeness"", then, has to be related to the nature of the attempted predictions.  I've often seen that people say that the ""most speculative"" investments (in my use above, those in which the attempted prediction is most chaotic) have these sorts of properties: And there are probably other ideas that can be included. Corrections/clarifications welcome! P.S. It occurs to me that, actually, maybe High Frequency Trading isn't speculative at all, in that those with the fastest computers and closest to Wall Street can actually guarantee many small returns per hour due to the nature of how it works.  I don't know enough about the mechanics of it to be sure, though." I think by definition there aren't, generally speaking, any indicators (as in chart indicators, I assume you mean)  for fundamental analysis. Off the top of my head I can't think of one chart indicator that I wouldn't call 'technical', even though a couple could possibly go either way and I'm sure someone will help prove me wrong. But the point I want to make is that to do fundamental analysis, it is most certainly more time consuming. Depending on what instrument you're investing in, you need to have a micro perspective (company specific details) and a macro perspective (about the industry it's in). If you're investing in sector ETFs or the like, you'd be more reliant on the macro analysis. If you're investing in commodities, you'll need to consider macro analysis in multiple countries who are big producers/consumers of the item. There's no cut and dried way to do it, however I personally opt for a macro analysis of sector ETFs and then use technical analysis to determine my entry and/or exit. "The calculation and theory are explained in the other answers, but it should be pointed out that the video is the equivalent of watching a magic trick.  The secret is: ""Stock A and B are perfectly negatively correlated.""  The video glasses over that fact that without that fact the risk doesn't drop to zero. The rule is that true diversification does decrease risk. That is why you are advised to spread year investments across small-cap, large-cap, bonds, international, commodities, real estate. Getting two S&P 500 indexes isn't diversification.  Your mix of investments will still have risk, because return and risk are backward calculations, not a guarantee of future performance. Changes that were not anticipated will change future performance. What kind of changes: technology, outsourcing, currency, political, scandal." In practice momentum and trend following are two different ideas, albeit similar and often ocurr simultaneously.  I don’t know if the book makes a clear disctinction between the two but keep this in mind:  1) Momentum trading is a trade where prices are increasing/decreasing and an increasing rate usually confirmed by heavy volume.  Like you said, this can often be at the top of a bubble or nearing a bottom of a crash but not necessarily.  It may also occur when trend trading is violated (switching directions or a new trend emerging)  2) Trend following is a trade where one could draw a disctinct linear line in a chart (up or down at some angle).  Being able to draw a line into the future would be your projected ‘trend’ target.  You could buy now and say “the trend is up, in 365 days the S&amp;P 500 will trade at 2,based on the trend we’ve seen in the past year