KimStefan's recent post on his business reminded me of some recent ones about yields on investment and how to value a business.

If someone sold you a business for $1 million which over time averaged income of $70,000 per year, with some years much higher, some lower, and many losing quite a bit, you might wonder if you overpaid. That's the stock market, which is probably better considered an investment - not a business. A business is a system where the proprietor can have some large direct effect on outcome (income), and ostensibly be compensated for personal abilities and effort.

To a great extent, each person is a business; with various assets, liabilities, capacities, and reserve capital, as well as capitalization of barriers to access. Perhaps successful traders are rare because they compete in a system with few barriers to access (no degrees or licenses needed), and irregularly dispersed severe reward/punishment which restricts long term success to supernatural intellects and/or stomach for pain. By definition no obvious profitability is persistent, and by correlation few can adjust to an unstable reward/punishment schema.

Yet there are the undeniable attractions of heroic market figures, who bravely took huge risks to finance their opinions of the world, and got it right. Walter Mitty, had there been an Internet, might have hoped to make a fortune trading markets (while keeping his desk job).

If trading, what becomes of those attributes beyond using an iron gut to second guess a random system? A trader with people skills, charm, or good looks squanders these normally valuable assets yoked to the torture machine all day. There are lots of folks who make very good stable incomes, if for no other reason than that humans are social animals who will pay to feel better.

There seems no shortage of causes behind the data showing that a very small fraction of traders out-perform the market long term.





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