Making Money with Money

Itrade in the markets. I expect to win. I expect to profit handsomely by trading, over both the short term and the long term. And you can and should, also.That said, I don’t have any surefire “system” to offer, nor any original mathematical or analytical techniques to employ, nor any special knowledge of a market or markets.

I concentrate on method, that is, an approach to the development of trading strategies that put the likelihood of profit on my side of the table. With your permission, I propose to illustrate several means by which you can do so, too. Since time is money—and time absolutely is money when trading the markets—let’s get right down to cases. Let’s play a game, a wagering game.All games have rules, and here are the rules for this one:

1. I select all the wagers to be made between us.

2. You will pay me, in cash, an indeterminate amount of money that I will
name before I will accept your wager.

3. Wagers are not settled immediately, but after some amount of time, and
the net value of both our wagers fluctuates day to day.

4. Either you or I may transfer our wager to a third party of our choice at
any time prior to settlement.

5. I can purchase insurance against a bad outcome of my wager at any time,
while you may or may not be able to insure your wager satisfactorily.

6. You know at the start that if you see your wager through to the end, you
will win only one time in four or five, but that winning wager may be
enormously profitable, and that the other times you will likely lose your
whole wager.

7. Other rules may apply from time to time, or there may be changes in
the rules, according to circumstances over which neither you nor I
have any control.

Do you really want to play such a game? Right, I didn’t think so, and your decision to refuse this game is entirely accurate. Those who do play such a game lose, just as you almost surely would. Not all the time, certainly, but they lose, and steadily. Why would anyone kick his own shins by playing a game such as this? I really don’t know. Misplaced hope, or greed? Possibly.Lack of information or failing to analyze the game properly? Perhaps.

Outright stupidity is definitely in the running, too, as is compulsive gambling.Believe it or not though, large numbers of people play a game highly similar to this every business day of the year. They spend a great deal of time and capital buying options that are exceptionally unlikely to return a profit to them, an activity that is functionally identical to the hypothetical game I just described.

For the most part, I trade against these folks, which implies directly that I win some very large percentage of the time.There is only one legitimate reason why someone might play our hypothetical game or any of its real-world analogs. He may be required to play by law, much as you and I must purchase car insurance in order to drive legally.We could be cynical here, and note that the game I’ve described is more than a little bit like my taking the part of an insurance company.

The only rule that doesn’t really fit is the rule about your possibly making exceptional profits from time to time. Making a profit is impossible when dealing with insurance companies, except, of course, if you can manage to defraud them successfully.The point of this example is not that there is some terrifically profitable game waiting to be played, but rather to find a starting place.

What is it, really, that we’re doing when we trade? In the sense of the example, and as far as some mathematicians are concerned, we’re playing a game. Many other people would answer, very reasonably, that we’re trying to make money. Both answers, though, miss the mark to some degree, and this error is not only not unimportant, it is vital. What traders do is attempt to make money with money, within a societally defined game-like context.

Does this strike you as a bit odd? It should. Money is primarily a tool for use within the context of society. Suppose you have a huge stack of $100 bills right in front of you. Suppose also that you’re in a house outside West Broken Glass, Montana, the pantry is bare, your car won’t start, and the phones are out.

A flood has just washed out the bridge on the road to town, your nearest neighbor is miles away, and, worse yet, there’s nothing good on cable. How useful is that stack of bills now? Hardly useful at all (well, you could light them to keep warm for a little while). Other tools do not share this limitation of usefulness only within a specific context. A can opener works just as well at the North Pole as it does at the Equator, or in your kitchen.