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Tigrenok
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what makes profit attainable ?

May 28th, 2004, 12:42 pm

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
 
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gammashark
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what makes profit attainable ?

May 28th, 2004, 12:46 pm

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.
 
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Scotty
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what makes profit attainable ?

May 28th, 2004, 9:59 pm

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.
 
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ManuLondon
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what makes profit attainable ?

May 29th, 2004, 10:04 am

Essentially most theories pretty much agree on three types of market players:- Hedgers- Speculators- Noise tradersHedgers are people who do not like the risk, and are prepared to pay a bit of cash to transfer it to speculators. In the world of commodities, hedgers could be farmers for example, who would want to be able to sell their wheat before it is even produced, so that they can book the profit on their book straight away. To this effect, they essentially sell futures contracts for later delivery.Speculators buy the futures issued, because they believe that the wheat is going to go up.So in effect farmers transfer the risk to speculators, who therefore get paid a premium for accepting the risk involved with buying the futures contracts.Noise traders are noise traders, adding up to the volatility, and probably loosing money of breaking even... day traders typically.The same forces apply in the stock market essentially.As for banks, I am not sure which part of their profit is actually due to speculation, and which is not. What most of their business is about is essentially have sales trying very hard to persuade investors/speculators/institutions (companies) to use some complicated instruments to reduce/increase exposure to specific events. Their traders "price" these, taking a small margin on the actual calculated price, and then remaining market neutral be neutralising all risks (delta/gamma/vega/rho = 0 ideally).Now they also run their own funds. Which part is risk free and which is not I am not sure...CheersEmmanuel
 
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EarthwormGod
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what makes profit attainable ?

May 29th, 2004, 1:02 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.
 
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ManuLondon
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what makes profit attainable ?

June 3rd, 2004, 1:48 pm

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 ; - )
 
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EarthwormGod
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what makes profit attainable ?

June 3rd, 2004, 2:15 pm

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.
 
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ManuLondon
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what makes profit attainable ?

June 4th, 2004, 9:19 am

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.
 
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ManuLondon
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what makes profit attainable ?

June 4th, 2004, 9:28 am

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.
 
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EarthwormGod
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what makes profit attainable ?

June 4th, 2004, 11:57 am

QuoteOriginally posted by: ManuLondonIf you take a system isolated from the rest of the world (energy wise),Nice if. But that's not what we're dealing with. In fact, the further apart two obects are separated by space, the greater their energy. You can use local entropy, or isolated entropy to solve certain types of Shannon-type math problems. But it is only to the extent your assumptions are incomplete or invalid, that we have economics. It's kind of like you round up or cut off a repeating decimal to put the physical world in an equation, and the entire properties of the universe evaporate. I think that was part of the point of my original post, that professors who use T accounts to conserve things will never understand why profits are attainable, or why the arbitrage pricing theory is nonsense when you can invent or create any additional asset with any returns characteristics, and destroy any other at any moment. The only constraint is time, but even time allows some movment, or else there wouldn't be any assets to arbitrage between. That misguided fellow what's-his-name who wrote "Open Universe" or whatever it was called, is sadly the best math-oriented people can hope to do in terms of grasping this. When you say "every even number," for example, you are referring to an infinite variety of things. The statement is meaningless, or has to have meaning added when we further specify the finite set of numbers we are talking about. Math can only make statements about closed systems.QuoteOriginally posted by: ManuLondonThe 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,I'm not educated in physics. But our brains would be in different states if we learned different things. Therefore, to the extent there are revelations about the state of the surrounding cosmos, which revelations progressively filter the paths of possible future revelations, and to the extent our brains are part of the Earth, the "local order" of the Earth is rising even as redundant oil molecules are cracked. But it is conserved to the extent the cost of transmission of these revelations is paid in the exhaustion of gravity. However, since we have the gravity, somebody must have originally gotten it for free to give it to us. And there is no reason to be certain it will ever stop giving, particularly given the possibility that we are bathed in the descriptive radiation of infinite big bangs, separated by arbitrarily large time intervals. When we send a rover to Mars, we learn more incremental information about the origins of our solar system than we could by spending the same energy on Earth. We make a profit. We can't help but make a profit in an open universe. We were put here by God for this very purpose, and without us the equations would be incomplete.QuoteOriginally posted by: ManuLondonbut 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.You could have said this a million years ago, or you could say it a million years from now, and 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. We haven't come close to burning up the entire Earth in an e=mc2 reaction, and even thinking in those terms in the timeframe of human existence is ridiculous, and applying that to a specific man-made, man-invented commodity is even more ridiculous. If the universe was collapsing to a point anyway, than how can surfing on that be a cost? You might as well call the passage of time itself a cost, but it's not like we can stop it by driving smaller cars or by not getting out of bed. It is not even clear that a small handful of hippies can slow down the surfing, or that oil used sooner rather than later doesn't somehow increase the net present value of future surfing. I am of the layman's opinion that the universe will never reach that end point, but rather there will always be objects at a distance in space, which any mass or energy can be used to attract and create more heat upon their collision. Now if you could introduce me to a physics professor who could even half understand how economic activites are coordinated, rather than the average idiot like Einstein who advocated "production for use" over "production for profit," I might look into some of his single-vantage-point mumbo jumbo.
 
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ManuLondon
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what makes profit attainable ?

June 4th, 2004, 9:50 pm

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 ?
 
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ManuLondon
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what makes profit attainable ?

June 4th, 2004, 9:56 pm

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
 
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ManuLondon
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what makes profit attainable ?

June 4th, 2004, 9:58 pm

>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 ?
 
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EarthwormGod
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what makes profit attainable ?

June 4th, 2004, 10:15 pm

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?
 
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ManuLondon
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what makes profit attainable ?

June 4th, 2004, 11:17 pm

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 !
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