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Comment by jmyeet | Hacker News Reader

Businesses need to decide if they’re market makers or speculators. Often they masquerade as market makers but they’re really speculators.

Example: Las Vegas casinos aren’t economical to build. They got built by property developers speculating on real estate and using those gains to fund a casino. Property developers really shouldn’t be speculators.

So if your business is used cars, what are you? If you’re a market maker you maintain a small inventory and sell quickly. If you keep cars on your books you’re speculating on used car values. That was a good bet (it is gambling) in 2021. Now? Not so much.

The trap companies fall into is that the margins are too small or the volumes too low so they end up speculating whether they intended to or not. To be a good market maker you have to be really good at buying. Accidental speculation is gambling. A good year convinces you that you know what you’re doing until it blows up in your face.

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>Often they masquerade as market makers but they’re really speculators.

>Example: Las Vegas casinos aren’t economical to build. They got built by property developers speculating

I don't think you know what "market makers" are. A property developer might "make" casinos, but they're not market makers. That would be someone buying property and then rapidly selling it off.

Property developers are exactly like market makers. If they hold inventory, they’re property speculators.

The key point is that property prices remain stagnant because a property developer creates value, turning undeveloped land into condos, etc.

Building casinos requires riding property values.

They are not market makers. They buy property and improve it's value and sell it. They are a normal business. They do not buy property just to hold it.

I agree with your fundamental point, but I dont think you are are using market makers in the conventional manner with respect to property.

A market maker doesn't hold assets for appreciation. They make money on the transactions spread, not hold and speculate. The New York Stock Exchange is a classic market maker.

Property developers are classic speculators.

"Market maker" is quite a specific term and is typically used to describe companies providing liquidity in a market for a given good/asset/etc. They are almost by definition not speculating, they are in the business of liquidity, and are compensated for providing liquidity.

Speculators would (try to) buy low and sell high, whereas a market maker could well buy high (when speculators are trying to sell) and sell low (when speculators are buying). That sounds counter intuitive, but of course speculators aren't always right, and market makers typically aren't holding assets for enough time for prices to move much, and they make money off a small spread.

> Example: Las Vegas casinos aren’t economical to build. They got built by property developers speculating on real estate and using those gains to fund a casino. Property developers really shouldn’t be speculators.

What does this even mean? Las Vegas casinos are doing well financially.

Moral judgments about property developers not being allowed to speculate that improving their properties might make them more valuable is a weird line to draw.

Iirc casinos often have weird financing akin to movies where they almost intentionally go bankrupt to squeeze out the smaller investors/get better terms.

The trick is to be the main lenders so that it reverts to you on foreclose, or so I’ve gathered. It’s not something I’d invest in personally.

Can you name a business that isn’t speculating on anything?

> Can you name a business that isn’t speculating on anything?

Insurance companies, casinos, stock exchanges, utility companies, universities.

If it were not for government regulation, these companies would have near, infinite riskless profit.

Certainly not riskless. Before government regulation many of these industries went bust often. They are usually credited as some of the first regulated industries due to their societal value and their nature to go under.

All those things are replaceable if the incentives align. So I don’t think large profits would be risk free.

Oil refineries, aluminum smelters, steel mills, farms, mines, car manufacturers, chip makers, the list is endless.

Often such businesses will use financial instruments to remove risks (and potential rewards) from market fluctuations eg commodity futures, exchange rate swaps, etc.

This reminded me of another example of accidental speculation. An airline used rolling 6 month commercial loans because it was cheaper than long term bonds by a few basis points. This was fine until it wasn’t. Interest rates spiked and the airline was suddenly insolvent.

They’d inadvertently become a speculator on interest rates.

Farms plant seeds, which costs some amount of money. They then wait for a harvest, at which point they hope that the sale price of that harvest covers their expenses. How is that not speculation on the price of a given crop?

Planting seeds to grow crops is an example of creating value, not speculating. If the crop price remains unchanged, the farmer is fine (generally). Often the risk of price movements over the season are hedged with futures as well.

Speculating would be needing the price to go up to turn a profit or not selling your crop in the hopes that the prices increases in the future.

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