I suppose there are a couple of ways to make money. You can ‘create value’, add something to the ‘greater good’ a product or service that will make you rich, others better and happy and feel good. You can, over time, monetize whatever that ‘thing’ is… and all good right?
The other way is my way, it can be a zero sum game and I am the ‘taker’ not the ‘giver.’ Make money by taking it from others. Ouch!.. Really? Yup… It may not be labelled as stealing, but it certainly is ‘taking.’
Let me explain… You have a stake on the table. For whatever reason you have an advantage… math skills, better algorithms, insider knowledge (God forbid) or anything else…
Bet it all?
You have an edge, but you are not sure, certainly not positive. But you think you have something here… or there… You have a 55%/45% probability of winning… You know, the classic gamble: Queens against an Ace-King all-in pre-flop in a hand of cash Hold’em. How much do you bet? Do you ‘bet it all?’ If you bet it all each time you think you have the mathematical advantage, you will eventually and certainly wind up with nothing. Then you will have no money left to bet and have to go get a real job (God forbid).
There is this concept called ‘Optimal F’… Optimal F is built on a house of cards of assumptions, but at least it is a strategy. The equation is rather complex and I won’t bore you with it but essentially tells you the maximum that you want to bet given your stake and the ‘certainty’ that you have an advantage. All sorts of assumptions pollute the equation and thus your attempt to maximize, but at least it is a shot at making sense of nonsense.
Avoid the F
If you lose your entire stake it is the worst thing imaginable. You can no longer ‘make money with money.’ My advice is to stay clear of the frontier of optimal F. If you don’t have money you can’t take money, then you have to work and perform horrible labour and report to The Man.
We make money at hedge funds by grabbing it out of ‘thin air’. More accurately and honestly portrayed by ‘taking it from others.’ So what? Hey, we have not added value to anything but our investors. Good enough for me, certainly not for Government work, or is it? No matter…
Go build a better mousetrap or some sort of imaginary fairy dust thing. Or how about this… Make money with money… Just guard that money through Optimal F, as working for a living is a bitch.
By the way, I can’t resist… N= (F*equity/risk)/price
Told you it was based on polluting assumptions…