SERVING THE QUANTITATIVE FINANCE COMMUNITY

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Tigrenok
Topic Author
Posts: 60
Joined: January 21st, 2003, 10:45 am

### what makes profit attainable ?

what allows IBanks and HFunds to make profit ?in average market trading should be zero-sum game (if we assume that markets are fluctuating)i have following thoughts and would like listen to others:1) markets growth (somewhere I saw that in general buy-n-hold is most efficient strategy). New investors brings new money - this forces markets to grow (in average)2) inflation3) existence of non-players. Corporations sometimes whant to re-buy their bonds. But what happens to stocks? (In general it is still not very clear fo me benefits of stocks issuing)what else ?// sorry for grand-topic, but it is still revolving in my head

gammashark
Posts: 178
Joined: August 10th, 2001, 12:34 am

### what makes profit attainable ?

You might want to pick up Culp's new book, Risk Transfer, which addresses this very topic as part of a broader discussion about the role of derivatives.

Scotty
Posts: 58
Joined: September 3rd, 2002, 5:59 am

### what makes profit attainable ?

With respect to hedge funds:One source of the transfer of value is that many investors, including most mutual funds, are constrained - for example they can't go short - which allows hedge funds to take advantage of them.Another source is the general pricing inefficiency in the market. For example, they go long and short stocks that are under and over priced respectively.

ManuLondon
Posts: 47
Joined: April 12th, 2003, 8:43 pm

### what makes profit attainable ?

EarthwormGod
Posts: 51
Joined: September 8th, 2003, 12:10 pm

QuoteOriginally posted by: Tigrenokwhat allows IBanks and HFunds to make profit ? in average market trading should be zero-sum gamePeople must get or sell their inventories somewhere other than the market. In other words, instead of going to Chicago to buy their butter at the CME, they buy a cow and make it that way. Or, instead of trying to sell their gasoline on the Nymex, they use it to drive to Boston and make their money back that way. The US GDP last year was trillions of dollars, did somebody lose that much money? No, because most resources are not bought from and sold back to the same person. Most of them, such as oil and gold, come from the ground and sky, who get everything for free. There is no magical boundary between some small number of zero-sum markets and everything else, there are no zero-sum "markets." A person who buys a stock or bond is not so much buying an existing bond, as ordering someone to make a new stock or bond. Suppose I were to go in and start bidding $10,000 a share for Dell stock tomorrow. Everyone would quickly sell me all their Dell stock. But those people would still want stock, so entepreneurs would ask the Federal Reserve to print money, so they could buy equipment and factory space, and sell shares in it as new stock. They would hope to make a profit to the extent future people could be expected to borrow even more money from the Federal Reserve to buy the larger number of computers at the same price. If I were to go bid$50 a barrel for oil tomorrow, some new person would build a drill and pump a barrel of oil out of the ground to meet my demand, when he would have otherwise stayed in bed. If I were to offer one extra barrel of oil for $1 after everyone else was done trading, someone would buy it and drive to Phoenix, who would have otherwise stayed home.Suppose every day I buy an apple for lunch. Then one day I buy an orange instead. Does somebody else have to eat an apple now, who otherwise would have eaten an orange? No, because it's all gone every day, or at least every few years for things which last longer. Farmers can make all apples, or all oranges, or all pears. There is not a finite pool of assets to choose between, there is an infinite pool. Assets aren't bought from someone, they are invented. A few hundred years ago, there was no such thing as crude oil, now we have billions of barrels of it. In truth, assets are purchased out of thin air, and then consumed with great pleasure. When you purchase a security, you are issuing a description of an asset to be made out of nothing.Thankfully, you don't have to understand what makes profits attainable to engage in profit-making activities. You only need to know what makes profits attainable in order to vote for a politician who will let you engage in profit-making activities. Unfortunately, no one in this thread has this knowledge. Where do profits come from? No professor at your university can tell you. They can tell you George W. Bush is stupid, and they should run the world instead. And then they would make it illegal for people to have babies or drive big cars, because the world is a zero-sum game and we are soon to run out. ManuLondon Posts: 47 Joined: April 12th, 2003, 8:43 pm ### what makes profit attainable ? That's also quite right, looking at a larger scale it's all a zero sum game, if you take the earth as a system, with the human beings on it, then nothing is gained nor lost (Actually a bit is lost, as enthropy>=0). But in the market as you say if you manage to extract Oil then it's free and you can sell it, however there is a cost for the planet ...And we are going to feel it quite soon actually ; - ) EarthwormGod Posts: 51 Joined: September 8th, 2003, 12:10 pm ### what makes profit attainable ? QuoteOriginally posted by: ManuLondonThat's also quite right, looking at a larger scale it's all a zero sum game, if you take the earth as a system, with the human beings on it, then nothing is gained nor lost (Actually a bit is lost, as enthropy>=0).This is false.QuoteOriginally posted by: ManuLondonBut in the market as you say if you manage to extract Oil then it's free and you can sell it, however there is a cost for the planet ... And we are going to feel it quite soon actually ; - )You're joking, right? Can you point to another resource which has created this "cost for the planet" or explain what makes oil special? Can you even define "cost for the planet?"QuoteOriginally posted by: ManuLondonHedgers are people who do not like the risk, and are prepared to pay a bit of cash to transfer it to speculators.They are not prepared to "pay a bit of cash," not any more than Heron of Alexandria was willing to "pay a bit of cash" to not invent the steam tractor, which failure probably "cost" him at least$900 billion. The problem with this manner of thinking, is that you can select anything from reality, to the universe collapsed to a single point, use it as a basis for comparison, and say people paid cash for the alternative. These people are flat out selling something. Speculators are not absorbing the variability, they are decreasing the variability.

ManuLondon
Posts: 47
Joined: April 12th, 2003, 8:43 pm

### what makes profit attainable ?

The cost I am refering to are not measurable in actual dollar term, however if you measure it in W (Watts, or even J - Joule), then you will find that effectively the planet is actually losing some Watts, when deprived from non renewable sources of energy, the only thing is that it's not actually easy to meaure it in actual dollar terms. From our point of view humans, we consider the planet a free ressource (to some extent).The process is (I am illustrating it only with oil, but it could be applied to something else):- Find an oil field, buy it for peanuts, say \$3B- Extract billions pf barils, make tons of profitsThe result is that the earth loses the oil, and that the oil company makes billions at the expense of the planet (measured in Watts).Now if you look at the humans' point of view sitting on the other side, then they are quite happy with this, but one day of the other, there won't be any more oil, and we'll have to find something else to create Watts (this cost actual dollars). So you could probably say that each time you sell a barel of petrol, the cost for the planet is the profit you make of it. This is "Dollars" that the earth is losing.

ManuLondon
Posts: 47
Joined: April 12th, 2003, 8:43 pm

### what makes profit attainable ?

There is no secret, as Lavouasier said:"Rien ne se perd, rien ne se créer, tout se transforme", meaning "Nothing is lost nothing is created, everything is transformed".The only problem is that later on was discovered the 3rd principle of thermodynamics, which can be summarized as dQ/T>0. This means that the "Order" is always lost in the universe, that further means that if you introduce order on the earth (Which is essentially what we, humans, are doing), then the overall cost for the universe is a loss of energy. If you take a system isolated from the rest of the world (energy wise), then it can only become less "ordered" with time...Extended, that actually means that a long time ahead, the universe will be a space where the temperature will be uniform everywhere, which is very scary... no stars, no planet, just a magma of Fe at a the same temparature everywhere... and we humans are just helping the process fasten a bit... with our habits of trying to order everything.

EarthwormGod
Posts: 51
Joined: September 8th, 2003, 12:10 pm

### what makes profit attainable ?

ManuLondon
Posts: 47
Joined: April 12th, 2003, 8:43 pm

### what makes profit attainable ?

Now this is getting interresting ! However I feel that we have deviated from the original question to which my answer is:"We make the dollars that the earth is willing to give, or that other people are not willing to fight for (e.g. hedgers)"Simple isn't it ?

ManuLondon
Posts: 47
Joined: April 12th, 2003, 8:43 pm

### what makes profit attainable ?

Reading your comments again, it is funny that I found in my uni years, that mathematicians are (to some extent) unwilling to try and translate their [VERY GREAT] abilities in physical, or rather NATURAL language some of the principles that appear very easy to apply indeed. They sometimes remain enclosed in a room of pure mathematical concepts, without any common sense, ever remaining clusters of theorethical concepts which bear no relationship with nature.This is what I like in physics, you always have to "come back to earth" to fully understand the use of it.It was quite a constructive discussion though

ManuLondon
Posts: 47
Joined: April 12th, 2003, 8:43 pm

### what makes profit attainable ?

>there is no proof that the world will ever stop giving, or that more than half of its giving will ever be in the past Actually concerning oil, you could probably consider that the maximum amount of oil is the current mass of the planet itself, that gives you an upper boundary for a start.As a mathematician you shoul accept this boundary, or don't you ?

EarthwormGod
Posts: 51
Joined: September 8th, 2003, 12:10 pm

### what makes profit attainable ?

QuoteOriginally posted by: ManuLondonAs a mathematician you should accept this boundary, or don't you ? No, I don't. Because on that day the price of oil would be infinite. And no matter what the carrying costs, infinity pays returns. And yet, the price of oil today is no fraction of infinity. Or something, blah blah blah.BUT... I'll consider conceding your point IF you and MattCushman promise to introduce me to some of your math-groupie girlfriends. Deal?

ManuLondon
Posts: 47
Joined: April 12th, 2003, 8:43 pm

### what makes profit attainable ?

HA HA HA !!! It is well known that scientists don't really mix up with babes very much do they ? Or the ones they mix up with don't live on this continent to be more exact I can suggest a Wilmott Dinner in South East Asia though, there it seems to work amazingly enough !