What Game Are You Playing?

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You might be a very good trader. More likely, you are not. The markets are not like Lake Wobegon where all the children are above average. Personally, I think that I am probably an average trader, which is why I don’t trade much. That said, there is a reason to avoid thinking of trading as a way to make money. It is a negative sum game for those who are not market makers, specialists, or high frequency traders, whose computer algorithms generally make intelligent trades against order flow from everyone else.

Q4 2020 hedge fund letters, conferences and more


Stocks derive their value from the stream of free cash flows that can be used for:

  • Dividends
  • Stock buybacks
  • Debt retirement, and
  • Intelligent investments that improve future free cash flows.

Though I am not bullish on the market over the next ten years (my model indicates 1.11%/year from the S&P 500 over the next ten years, not adjusted for inflation), I know that over the long haul that equities tend to prosper unless there is war on your home soil, famine, or severe socialism. Investing over the long-term is a positive sum game, but it means you must have the capacity to invest for the long-term, and own things that are presently out-of-favor.

In short, people don’t make money on average when they trade. People make money as they hold their assets and wait.

Article by Aleph Blog

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