For you to do well, someone else has to do poorly, relative to the benchmark.  

It is a negative-sum game after all.  I am not going to touch “have everyone do worse, so I can do better.”  I suspect there are probably some prominent people out there who do this, but not enough to warrant spending more time on it than I already have.  So let’s just look at the game from a “be the best you can be” perspective.

The major players.

The next logical step is to look at the lay of the land, and figure out how this negative sum game looks like it may play out:

  1. There is you.
  2. There are all the investment bank traders, who may have more information than you:  they see swap flows, they see bond flows, they see FX flows, they may have physical storage of commodities, etc.  They may even participate in the setting of certain rates or prices you trade off of.  They also hire a bunch of full-time economists and analysts.
  3. There are all the hedge fund traders, who are selected for their track record and experience.  They may even have (direct or indirect) connections to people at various senior places, like the central bank you look at, the corporations whose securities you trade, etc.  They also hire tons of quants who datamine the heck out of every piece of information available.
  4. There are all the investment companies who have research staff and portfolio managers, whose full-time job it is just to analyze the things you are trading.  They may even speak to senior management of companies and organizations on a regular basis.  
  5. There are the corporations that may be directly involved.  In the case of stocks, people there know a ton of stuff about the company that you probably do not.  Call it a hunch, but I’m not sure the insider trading laws work 100%.  Also, companies that need to hedge certain commodities will know what their production / consumption requirements are.

According to the Corollary, some people are going to win and thus some people have to lose.  So who looks like they may not do so well at this negative sum game?  [cue Jeopardy music]  Did I mention “illusory superiority” in any of the posts so far?  [cue rest of Jeopardy music]  In poker (another zero sum game), there’s a saying that goes, “If you can’t spot the sucker… at the table, then you ARE the sucker.” (from the movie, Rounders)  

The other players.

Okay, so I left a few groups out.  For example, individual traders worse than you.  But you have to figure these folks aren’t going to be trading in very large size, and after they blow through their money, they will not be around any more.  There are the central banks, who may or may not be great at identifying value.  Any time a corporation deals with something they are not familiar with, they also may have trouble spotting value.  There are also institutions that may have hedging requirements that may not look necessarily at value, like pension funds, hedging for bond issuance, etc.  So you have a shot.

The bottom line.

If you are going to do something seriously, and especially if you are going to try and make a living off of it, you need to prepare yourself to go against the best.  And to do that, you can’t just go in with no plan, and buy and sell whatever you feel like.  Do you know what taking this sub-optimal approach to trading is called?  It’s called “gambling.”

Again, the point of this post is not to make you feel bad.  But you need perspective and you need a plan if you want to go against the best and succeed.  Consistent success is a very attainable goal.  The rest of the  Philosophy of Trading will get you moving towards developing the strategy.