While all investors must trade, a "trader" by profession does not
technically make investments. According to Benjamin Graham, a founding
father of the value investing movement, an investment must promise
"safety of principal and an adequate return." Investors make informed
decisions after careful analysis of the business fundamentals of a
company. Traders, on the other hand, use technical analysis to place
bets engineered to profit on short-term market volatility.
In the early 2000s, it was not uncommon for people to quit their jobs,
empty their 401(k) plans and actively trade for a living from the
comfort of their homes. Fueled by massive stock market and real estate
bubbles, it was hard to lose money. However, this golden age has come
and gone. The year 2007 brought with it a global recession and
subsequent proliferation of financial regulation.
High-frequency trading,
carried out by computers running incredibly complex algorithms, now
account for between 50 and 70% of trade volume on any given day of
trading.
Traders frequently lose large chunks of money over the course of a
single day of trading, hoping that their gains will offset their losses
over time. They must also overcome significantly higher transaction
costs and competition with super-computers. While the cards are stacked
against traders in general, there are a handful of traders with enough
brains, boldness and capital to take on the odds.
Paul Tudor Jones (1954-Present)The founder of Tudor Investment Corporation, a $12 billion
hedge fund,
Paul Tudor Jones made his fortune shorting the 1987 stock market crash.
Jones was able to predict the multiplying effect that portfolio
insurance would have on a bear market. Portfolio insurance, a popular
risk management tool, involves buying index puts to lower one's
portfolio risk. Thus, in a bear market, more and more investors will
choose to employ their put options and drive the market down even
further. Jones' bet paid off big: on Black Monday of 1987, he was able
to triple his capital from his short positions. Jones is worth roughly
$3.6 billion today and is currently
managing his hedge fund.
George Soros (1930-Present)George Soros
is arguably the most well-known trader in the history of the business,
known as "The Man Who Broke the Bank of England." In 1992, Soros made
roughly $1 billion in a bet that the British pound would depreciate in
value. At the time, the pound had been introduced into the European ERM
rate - an exchange rate mechanism designed to keep its listed currencies
within a set of defined parameters to increase systemic financial
stability. With the help of his associates at his hedge fund, the
Quantum Investment Fund, Soros noticed that the pound was not
fundamentally strong enough to stay in the ERM, and built up a short
position to the tune of $10 billion. Soros is currently worth an
approximated $19 billion and is retired.
John Paulson (1955-Present)Praised
by some for executing the "greatest trade ever," John Paulson made his
fortune in 2007 by shorting the real estate market by way of the
collateralized-debt obligation market.
Paulson founded Paulson & Co. in 1994 and was relatively unknown on
Wall Street - that is, up to the financial crisis that began in 2007.
Foreseeing the asset bubble in real estate, Paulson's funds made a
reported $15 billion in 2007, while Paulson himself pocketed a tidy $3.7
billion. For profiting stupendously while the global economy staggered,
Paulson came under intense scrutiny of the U.S. federal government
during this time. Today, Paulson continues to manage Paulson & Co.
and is worth roughly $11 billion.
The Bottom LineJones,
Soros and Paulson all have one thing in common: their most lucrative
trades were highly leveraged shorts. The conflict of interest is clear.
Traders have every incentive to profit off of an imbalanced financial
market, often at the expense of every other market player. Furthermore,
their actions tend to prolong and exacerbate the initial financial
imbalance, sometimes to the point of complete and total market failure.
Should they have this capability? Well, that's for legislatures to
decide.
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