The Only Three Types of People Who Make Money in the Stock Market

Hint: It’s not you

Wall Street Plunges On Fears Of Lack Of Consumer Confidence

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I was standing in the atrium entrance of Steve Cohen’s SAC hedge fund and waiting for the man himself to offer me a job.

I had tried every possible combination of email addresses for him and kept sending him updates of how my trading was going. This was about a decade ago. I had no idea if I was reaching him.

Finally he wrote back, “What’s your IM?”

Then we started instant-messaging. And then he asked me to drive over to his office. I was there the next day. I was jealous of everyone walking around in the office. They were good enough to work there, but I wasn’t. Maybe this time.

I showed him a book I wrote about trading. “I like this stuff,” he said and threw the book on the chair. He told me, “You’ll get better economics working for me than trying to make it on your own.”

So we decided to test something out. Before every trade, I would instant-message him the trade, and then he can see how I work.

No problem, I thought. I was on a winning streak with close to 100 winning trades in a row.

Then the next seven trades I messaged him I lost money on. I was devastated. I stopped messaging him. “What happened?” he wrote me once. But I was too ashamed to respond. I really wanted to work there. The dream was over.  Eventually, I left the industry.

Now Mr. Cohen is paying a fine. That just means he wants someone to stop bothering him.

But I do have to say, anyone who thinks they can make it in the trading or hedge fund business at this point is smoking crack. You might as well put your money in that pipe and smoke it also.

Three types of people, and only three types of people, make money in the stock market.

1. People who hold forever. For instance, Bill Gates and Warren Buffett hold shares of their own companies, Microsoft and Berkshire Hathaway, respectively, pretty much forever, and that is the bulk of their net worth. They are the richest people in history, so this seems like a good technique: Build something of value, and ride it until you die.

2. People who hold for a trillionth of a second: High-frequency traders trade thousands or even millions of times in a second. They take tiny little arbitrages and add them up throughout the day. They rarely have a losing day. Who does this? Goldman Sachs, some of the bigger hedge funds (including Cohen’s) and anyone who has the money to wire right into the exchanges.

3. People who do something fishy. In the 80s it was trading ugly junk bonds. In the 90s there was a trick called “playing the calendar.” You’d make millions of trades with a broker like Goldman Sachs. You would play both sides of the trade so you would only lose a little bit of money. The brokers would get a ton of fees. What would you get? A big allocation in an Internet IPO. You’d check “the calendar” to make sure you were trading at the right place at the right time. Possibly not coincidentally, The New York Post reports that “SAC hasn’t beat S&P since 2010 insider trading probe.”

Another trick in the ’90s was Reg S transactions. Look it up. A lot of people went to jail.

In the early 2000s, it was mutual fund timing. One large hedge fund manager told me, “When I heard Eliot Spitzer was on the other line, I simply told my secretary to wire over $80 million, and then they left me alone.” Other hedge fund managers fought and paid much larger fines. One former investor of mine is still fighting it in court in England. “I can’t give up,” he told me. “In the U.S., it’s O.K. to fail and move on. In the U.K., you’re guilty forever.”

In the mid 2000s, it was “death spiral” transactions. And then finally it was inflated mortgage-backed security trading.

Then it all came to an end. The only thing left, the only way anyone can make money (other than 1 and 2 above) is insider trading.

But insider trading is a very gray area. If an expert at a company gives you an opinion on the industry, is he giving you inside information?

Another issue: If there’s insider information happening anyway, should it just be legal and properly reflected in the price of the stock? Again: Who knows?

I traded for many years. It was very stressful for me. I’d feel the blood pumping through my body until I thought I was going to have a heart attack.

Some days, I’d wake up early and go to the church across the street and pray to Jesus, “Jesus, I hope you love me enough to make futures go up in the premarket this morning.”

I’m Jewish. My prayers were rarely answered.

The only way to make money is to deliver value to people. Don’t try to get rich playing a fool’s game.

Eventually, I started some companies in other sectors. Eventually, I wrote some books. Eventually, I did other things with my life and started to enjoy my mornings again.

Steve Cohen paid a fine of $1.8 billion this week. I hope one day he too gets to enjoy his mornings again.

The Only Three Types of People Who Make Money in the Stock Market