Here are ten ways to make money in the financial markets:
- Buy and hold index funds for 20 years
- Buy and hold big stakes in undervalued companies like Warren Buffet
- Buy a stock you like after doing 20 minutes of internet research
- Momentum investing
- Cross-asset arbitrage
- Market making (i.e. collecting the bid-offer spread)
- Trading around flows
- Exploiting loopholes in bond covenants
- Buy dogecoin right after Elon Musk tweets about it
- Buy microwave towers and speed race photons from Chicago to New York
On the margin, I think some of these are probably socially valuable on net, and some of these are probably not, and some of these I’m unsure about. The goal of this blog will be to develop a framework for cost-benefit analysis.
The financial market plays many distinct roles in society: among other things, it’s how we allocate capital to businesses, decide which resources to supply, share investment gains with the population, and store our wealth. If the financial market was only trying to fill a single purpose, maybe we could hope for an easy-to-describe efficient equilibrium, but we don’t live in that world.
This problem is very difficult, but progress matters. Between investor returns and fees, hedge funds and trading firms earn annual excess profits measured in the hundreds of billions. If you think what they’re doing is useless, then moatlessly automating and/or re-incentivizing the industry will add lots of value to the world in the form of talent reallocation. If you think some of those profits are earned in proportion to their social value, then getting better at solving the underlying problems might be worth even more.
My next post will focus on a more concrete market — the oil commodity future market — to build some intuition for trading concepts.