Ask HN: How do investors make money?

[catasaurus]

There is a lot of articles and books about how index funds are the only way that to make money reliably in the stock market. If this is true, how do other investors and day traders make money? I don't know about day traders, is it possible they don't make money. But investors? As in money managers, and straight up investors? Hedge fund managers and the such? I assume they don't just put their money in the S&P 500 and leave it there. If that were true their jobs wouldn't exist! So how do these people actually make money if there is no reliable way to predict the market and the market is not completely correlated to anything?

[pid-1]

In the hedge fund I worked analysts created valuation models for companies using accounting and market knowledge. The portfolio manager would create positions based on that. The whole process was very complex operationally, but that was the spirit.

They* were able to beat benchmarks (think S&P 500) consistently after fees and taxes. Caveat: they operated in an emerging market, beating S&P 500, Nasdaq, etc...is likely much harder.

I also know a guy that works in a fund that trades currencies. They sort of create "valuation models" for countries using macroeconomic variables and make positions based on that.

So there you go, calculating the "fair value" of something better than other market participants can make you money. Less crowded markets will have less people doing accounting and modeling diligently, so your chances of success might be higher.

* I was just the IT guy, can't claim I was a key part in the fund's success

[catasaurus]

I could understand that, but what about highly competitive markets like large cap NASDAQ and NYSE stocks?

[PaulHoule]

This paper is about an earlier time but it does an excellent job explaining how day traders and market makers make money

https://www.sciencedirect.com/science/article/pii/S0304405X9...

Ray Dalio has written a few articles about the strategy used by his "All Weather" hedge fund, a summary is here

https://www.bridgewater.com/research-and-insights/the-all-we...

Now he won't tell you how "Pure Alpha" works because if he did he'd have to kill you.

[catasaurus]

Lol. I will check those articles out.

[BMc2020]

The Trisolarans manipulate the market in ways that seem random but really aren't.

https://en.wikipedia.org/wiki/The_Three-Body_Problem_(novel)

[mooreds]

The research I've seen says that activist investors do make money, and sometimes even more than index funds.

However, there is no way for an average person to pick a money manager who will:

* earn above market returns year over year

* will earn enough to pay for themselves consistently