One of Wall Street’s Most Popular Trading Strategies Is Now Failing

I thought that is the definition of an "asset" which is a broader term.

the definition of a security has nothing to do with how they're valued.

I see your points but then the question becomes how to give them an incentive to leave those fields. It feels that they are the only one that pay and consider you to your true value.

On the other hand, why should brilliant people work for modest salaries, creating wealth for others?

> [...] Many of the most brilliant human beings of that era worked for very modest salaries, and seemed content to do so. I wonder why it is that nowadays the "smartest" people tend to work in tech or finance and mostly pursue wealth. A few possibilities:

This is something in essence that some of us at MIT get told by faculty upon telling them that we want to go into industry. Behind it, though, there is often a fair bit of arrogance: many of them can not truthfully say that they would not do the same if they had to accept an academic position at a "tier 2" place, long postdoc, etc.

That said, the spirit of the point is perfectly fine. My own personal answer is that I have no personal issue with the compensation in academia; the associated "bureaucracy" which is far more severe today (paper/citation counts, and other things of even less significance) turns me away. It remains to be seen for myself how "industrial bureaucracy" compares with it. However, everyone I know has told me that in terms of personal happiness/fulfillment, people who leave are usually much better off.

I mention this as I had a conversation where someone essentially assumed point 1 or 2 rather than the distinct reason above.

> [...] Many of the most brilliant human beings of that era worked for very modest salaries, and seemed content to do so.

IMHO this is so obvious -- cost of living, especially housing, healthcare, and higher-education.

A modest salary back in the 80s was good enough to raise a family on. A modest salary these days rarely does. Let me present some actual numbers:

My father purchased a house for ~30k USD. His annual salary was ~30k USD. He was always insistent on working at non-profits and did that for decades as an accountant/auditor/comptroller.

Today, I cannot easily afford the same house even on a mid-high-end salary because the affordability ratio is enormous 2x or 3x. Forget about affording that house on a non-profit org salary.

Further, Bell Labs was a very safe job, you didnt have to worry about layoffs as much back then. So you could further afford things by making a bet on an affordable suburb. That is a harder bet today -- you move to some affordable suburb (which still isnt as affordable as it used to be) and suddenly you've lost your job. You better hope it is close to a commutable metro area.

Same thing with healthcare. Same thing with higher ed. I joined finance, and later tech, because I saw the writing on the wall -- not because I was "pursuing wealth" but because I was pursuing the same exact lifestyle my dad had as a default.

Yes, that and improving efficiency of markets, the go to arguments for wall Street types. I used to be a sell-side trader, allocation of capital was the last thing on our minds. It might add value to the economy in the long run but I'm pretty sure it's way too crowded now with little marginal benefit. If we took the underlying technology and man hours used to make something more useful I think the world would be better off. Something is seriously twisted in its current state

If that is the case, then index funds are antagonistic to that goal. Capital gets allocated to bad-performing companies just because they are in an index that is favorable.

Everyone should then actively decide what specific companies they want to put their capital towards. Instead of baskets of indices.

> But there isn't really much room to debate that designing trading strategies is a waste of talent.

Are you saying it's not a waste of talent?

> Allocation of capital is one of the most important roles in society

Well...sure, but I don't see these people working to allocate capital to benefit society.

On the whole, the financial industry's influence tends to be to allocate capital to benefit the financial industry.

I get that liquidity is important, but it's not important enough that we should be siphoning off huge chunks of the money in the economy to give to these people as thanks for maintaining it. Frankly, that kind of concentration of wealth decreases liquidity and ends up, over the long term, being directly counter to the stated goal.

But people who have better insight into the real performance of those companies can make more money if more people just apply magic formulas.

I think both can be true, depending on the details of the strategy and the conditions in which it’s valid.

Sometimes common knowledge of a strategy can lead to the elimination of the situation in which it works. Participants can anticipate it and so the conditions no longer occur.

In other cases so many participants pike into the strategy, in which there is only so much money to be made, that returns get so thin that only the very most efficient and smart participants can get anything out if it. Arbitrage is a good example, once its known it can get traded out of the market very rapidly.

The stock market is basically a transfer of wealth from one person to another. For a good strategy to work, someone has to make a bad strategy. If everyone gets a good commodity strategy and applies it you will end up in a stalemate. Maybe not instantly but somewhere down the line.

At the end of the day arbitrage is zero sum, there is a fixed amount of money to be made from this market inefficiency (based on your margin, your costs and the amount you can buy and sell). Regardless if you are the only one doing it or not (if you are not you are competing for a piece of the pie).

Note that the strategies described in this article are not arbitrage nor zero sum.

> But does the future it sees include the purchases its about to make?

Yes, absolutely. Go back to Greek mythology (or even the Matrix movies). Many predictions the Oracle made only came about precisely because the Oracle made those predictions.