Trading is a zero-sum game

Trading is a zero-sum game. Traders must trade with people who will lose to become profitable. Profit-driven traders therefore must understand why losers trade to know when they should trade.


Profit-driven traders trade only because they rationally expect to profit from their trades, including speculators and dealers. Utilitarian traders trade because they can obtain some benefit from trading besides trading profits. Investors move money from current to future. Borrowers move money from future to current. Asset exchangers need to exchange assets. Hedgers want to lower the risk. And gamblers trade for the joy of trading. The profit-driven traders are rational, and they theoretically profit from providing the utility to the utilitarian traders. Identifying a general utility need is very helpful to identify opportunities. In the 2008 crisis, banks deleverage and few people have cash. It is the perfect time for Berkshire to make strategic deals as they are flushed with cash. In this sense, it is good to be different.

Investment Returns in 2008

The only strategies that made money this year are Short Bias, Volatility Arbitrage, and High Frequency Statistical Arbitrage. Other well known strategies, such as Fundamental Value, Emerging Markets, Commodities, Quantitative Equity, Fixed Income Relative Value, have suffered losses. Many managers are stopped out because of leverage and redemption.

At the end of November, Yahoo! Finance reported the results of some big name investors:

• Warren Buffett (Berkshire Hathaway): -43%
• Ken Hebner (CMG Focus Fund) -56%
• Harry Lange (Fidelity Magellan): -59%
• Bill Miller (Legg Mason Value Trust) -50%
• Ken Griffin (Citadel): -44%
• Carl Icahn (Icahn Enterprises): -81%

Comparing with them, our losses in 401K or house value is not that bad. Who is wrong? The market or us? Why even the savvy investors suffered? The answer is not simple. However, we should understand the bull market in the past decades no longer lasts. Experience, or backtest based on this period is illusionary. One either views the market movements as irrelevant like Warren Buffett, or respects the volatility in the market and admits that we do not understand everything. Be humble and safe. It is not easy to sail in the financial waves.