[czl]

Trading, particularly short-term "buy low, sell high" strategies, differs fundamentally from businesses that create products or deliver services. In trading, profits are often directly linked to the losses of other market participants, making it a zero-sum activity. In other words, for every winner, there must be a corresponding loser on the other side of the trade.

This dynamic is similar to gambling games like Texas Hold'em poker in a casino setting. While skilled players may consistently profit at the expense of less experienced participants, the overall wealth within the game remains constant. No new value is generated; instead, existing wealth is redistributed among the players based on their relative performance and luck. When research time and fees are added trading is largely “negative sum”.

NOTE: Some trading activities, such as market making and arbitrage, provide liquidity and help maintain fair pricing in financial markets but these operations require expensive low latency market access and are dominated by market insiders and are not possible for retail traders.

[mmarian]

While I do believe it provides liquidity in all cases, let's just focus on the zero-sum aspect. My response is - so what if it's a zero sum game? Why should someone care if that's the case? It's not as if all startups out there add value to the world.

[czl]

> It’s not as if all startups out there add value

There is a fundamental difference between startups and "buy low, sell high" trading. Even if only a minority of startups succeed, they can create significant value for society by introducing innovative products, services, or technologies. In contrast, even if the majority of traders were "successful," there would be no net value created, as one trader's gain is another's loss, and the overall wealth in the system remains unchanged.

> so what if it’s a zero sum game?

While you may not initially be concerned about the distinction between positive-sum and zero-sum activities in society, studying history and economics may change your perspective. Positive-sum activities, such as entrepreneurship and innovation, contribute to economic growth and improved living standards, whereas zero-sum activities, like “buy low sell high” trading, do not.

> why should someone care?

Consider this analogy: if "buy low, sell high" trading is like playing chess, and your opponents are a collection of the best chess engines money can buy, operated by the world's top experts (think Magnus Carlsen), how profitable can you realistically expect your trading to be? The odds are heavily stacked against the retail trader. Some professional traders pay brokers to have retail orders routed to them for this reason much like how professional poker players want to play amateurs for their income.

While a small fraction of professional traders manage to beat the returns of buy-and-hold index investing, the fleeting existence of market-beating strategies is not a valid reason for the average investor to attempt them. Just as you cannot predict which lottery tickets will be winners, you cannot foresee which trading strategies will outperform. If this was possible highly paid professional traders that devote their life to it would be able to do it but only a few actually do and luck plays a big role in their success.

Markets have “seasons” and what seems to work in one season can be devastating in another. Markets also change in response to the trading strategies being used (aka “reflexivity”) and “paper testing” can give false confidence.

[mmarian]

> Positive-sum activities, such as entrepreneurship and innovation, contribute to economic growth and improved living standards, whereas zero-sum activities, like “buy low sell high” trading

Right, so where do hedge funds fit in? They hire a lot of people and pay them very well; they sponsor tech events like this: https://www.man.com/pydata-london-59th-meetup. According to your rationale, they don't add any value to society?

And if you add the criteria that they should be a business - how do you think these active investors start? Do you think they just suddenly have $500m in funding and 50 people?

> how profitable can you realistically expect your trading to be? The odds are heavily stacked against the retail trader.

I'd expect it to be hard to become profitable, just like any other kind of business out there. You need to put in a lot of effort, a lot more than what people tend to expect; again, like with any other business.

> Markets have “seasons” and what seems to work in one season can be devastating in another. Markets also change in response to the trading strategies being used (aka “reflexivity”) and “paper testing” can give false confidence.

Sounds like a VC-funded startup to me :) You can make an amazing pitch deck, raise millions in funding, and burn it all to the ground when you realise there are no customers.

[czl]

> Right, so where do hedge funds fit in?

Hedge funds pool capital from a limited number of accredited investors or institutional investors. The term "hedge" originally referred to the fund's strategy of attempting to mitigate risk and generate stable returns regardless of market conditions. This was often achieved through a combination of long and short positions, as well as the use of derivatives and leverage.

Traditional hedge funds aimed to provide an "insurance policy" for investors, ensuring that they would be protected from market volatility. However, this protection comes at a cost, typically in the form of lower returns compared to the overall market during bull markets. In exchange for reduced volatility, investors in these traditional hedge funds would accept more modest returns.

Over time, the hedge fund industry has evolved, with many modern hedge funds focusing more on generating outsized returns rather than simply hedging against market risk. These funds employ a wide range of strategies, including long/short equity, global macro, arbitrage, and activist investing, among others. Successful hedge funds prioritize their own capital and that of their employees, rather than accepting outside investors. If a hedge fund is actively seeking outside capital, it may be a sign that the fund has not been particularly successful in generating strong returns on its own.

> According to your rationale, they (hedge funds) don't add any value to society?

Hedge funds can help provide liquidity in financial markets. Their trading strategies, while risky, can aid in price discovery but their activities don't produce anything tangible and mainly just shift money around between participants, as opposed to creating real economic value. Hedge funds are also criticized for increasing market volatility and systemic risk in pursuit of short-term profits.

> how do you think these active investors start? Do you think they just suddenly have $500m in funding and 50 people?

How do tobacco companies start? Just because smoking has the effect does it mean there can not be large tobacco companies employing lots of people? Yet the trend for tobacco companies is clear. So what is the trend between active vs passive trading? In 2000, passive funds accounted for about 12% of the U.S. stock market. By 2020, this figure had risen to over 50%. Why do you suppose this trend exists?

If you think smoking is fine you are free to smoke. You can also show off your large bank balance and argue that tobacco products “generated wealth” for you. However if you advertise smoking as being good for society expect to be challenged about your claims.

>> The odds are heavily stacked against the retail trader.

> I'd expect it to be hard to become profitable, just like any other kind of business out there. You need to put in a lot of effort, a lot more than what people tend to expect; again, like with any other business.

If you attempt to make it your business and heavily invest into it you are no longer a retail trader.

Is it a profitable business? The distribution of those who can earn an income with “buy low sell high” trading tends to follow a power law or Pareto distribution, where a small percentage of top performers earn a disproportionately large share of the total income. Unless you rank among the top few you are the source of income for those that do.

In competitive tournaments like chess / poker a small number of elite players consistently perform well and earn significant sums while the majority of players earn little or no income. The number of top spots is very limited and the competition is fierce.

When it comes to “buy low sell high” trading:

(1) the income is being earned is not from advertising sponsorships but only from other active traders who you can out predict.

(2) active strategies are not useful against index funds that buy and hold much like prediction is not useful against a rock paper scissors random strategy.

(3) As investors educate themselves the fraction of active traders is shrinking much like the pool of people that buy tobacco products is shrinking

> Sounds like a VC-funded startup to me :) You can make an amazing pitch deck, raise millions in funding, and burn it all to the ground when you realise there are no customers.

It may be con artists selling snake oil. It may be honest people trying their best. Time helps tell the two apart however you do not need time to understand that the tobacco industry is not a good industry but exists for legacy reason. Yes it can be profitable but consider where those profits come from and what the future looks like as more become educated.