Stock Market Profits: Luck, Insider Trading, Arbitrage, Big Fish, and Geniuses

Luck… Doing very well in publicly traded securities is sometimes a streak of good luck. I’ve had a terrific run on the craps table in Vegas many times. Eventually, I run out of good luck. Many people experience the same thing with trading.

Insider Trading… This is when a person has non-public information on which he bases a trade in a public securities market. It is illegal. Insider trading in public securities can lead to imprisonment. Insider trading in real estate and private investments can lead to extraordinary profits.

Arbitrage… This is the act of profiting from the mispricing of assets. When an ounce of gold costs $900 in New York and $895 in Japan, “arb” traders will buy lots of gold in Japan and immediately sell it in New York… theoretically risk free. When dealing with transaction costs, arb trading typically requires very large amounts of money to be carried out feasibly. For the Joe who has $150,000 in an IRA, arb trading probably isn’t feasible.

Big Fish… Investing in the stock market is a different story when you can afford to buy HUGE pieces of companies. Warren Buffett, often called the World’s Greatest Investor, invests on such a large scale that he recently commented that the Korean stock market is a great buy, but he won’t be investing in it… because most Korean stocks aren’t large enough to have a significant impact on his portfolio! You can’t follow Warren’s strategy because he reads all day in order to make trades in the several hundred million dollar range. What he does won’t exactly work when making $10,000 trades.

Geniuses… This may be you; it’s not me.

What I’m not saying

I don’t avoid the stock market like the plague. I do generally avoid mutual funds like the plague because it is surrendering – you don’t know where your money went. Picking stocks for your portfolio can make sense when you are honest with yourself in that it is speculative and high risk in nature. Accordingly, it should only be done with a small portion of an overall portfolio. What do you do with rest of your portfolio?

Reader Interactions

Comments

  1. Jeff,

    Thanks for the discussion of sources of profit- just wanted to point out a typo at the beginning of the last paragraph “I’m don’t… “.

    By the way, I appreciate how much content you consistently put into each of your posts.

    Thanks,
    Max

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