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How can there be a profession where some person sits at a desk and trades or invests for somebody else? If they are so smart and can predict the market so well, would they not long ago have invested their own money repeatedly in order to amass such a fortune that they would never have to sit and have this as a job for somebody else to make money with their supposed trading/investing skills?

The entire job seems self-contradictory to me, like somebody working hard every day to push a book on how to become rich quickly. It's obvious in that case that they aren't successful themselves, except in the sense that their book scam makes money by tricking the other people who hope to "also" become rich. Nobody who is actually rich and successful would be pushing a book containing the actual "magic trick" to this success, both because they wouldn't have to work (especially not with something non-rewarding like that) and also because it would be in their best interest to not mention this "secret trick" if they have somehow found it out themselves.

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    They could get the money from their own investments, plus some of your money in exchange for managing yours? – user253751 Dec 19 '19 at 15:13
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    Managing money is a service that some people see as having value and are willing to pay for. Your question lumps "con artist" and "get rich quick author" into the same class of profession as portfolio or money manager. – spuck Dec 19 '19 at 16:53
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    If I have $50k in savings, and I have a successful investment strategy that can double that in a year (contrived numbers, for the sake of example), I wind up with $100k. Yay, but not life-changing. If I can get someone with a billion dollars to sign on with me, I can charge them, say, $100M on their $1B in gains, leaving me wealthy and them happy. – ceejayoz Dec 19 '19 at 19:57
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    The old saying "It takes money to make money". @ceejayoz's example is great, but the general view (on this site) is that it takes 7 years to double your money. If you're not starting out super rich, it's still going to take you a looong time to amass a fortune so large that you never have to work – Mars Dec 20 '19 at 1:18
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    How can there exist a profession of bakers when anyone can buy eggs, flour, milk, sugar and a Delia Smith cookbook? – Valorum Dec 20 '19 at 14:40

12 Answers 12

93

Investing is not a way to get rich quick. It is a way to get richer over time. Fund managers cannot "predict the market so well". They do not have a secret trick.

What they can do, that other people cannot, is spend time researching into companies, understanding them, follow their news and understanding the results from those companies.

This potentially makes them better at picking stocks and managing portfolios than the average person. And therefore they are valuable to the average investor.

Returns on investment are based on capital invested, so by taking a cut of gains from other peoples' investments they can make more money than simply investing their own.

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    "This potentially makes them better at picking stocks and managing portfolios than the average person" and even if they're not significantly better than the average person would be (after they've learnt sufficient to know what they are doing), then so long as the professional is not much worse than the average person would be, many "average people" are happy to pay the professional a small cut to do the managing for them. In much the same way many people prefer to pay a tradesman instead of learning to be a carpenter or plumber themselves. – TripeHound Dec 19 '19 at 14:38
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    The key part here (which the "Returns on investment are based on capital invested" states but doesn't emphasise enough) is the huge, orders of magnitude difference in the amount of capital they're managing for others vs their own plausible capital. Keeping 1% from the gains from a billion dollars of capital is simply much more than keeping all the gains from a million dollars of capital. – Peteris Dec 19 '19 at 23:35
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    @TripeHound in addition, as with any other profession, most average people aren't even any good at it and would have a good risk of wasting money, either by betting completely wrong or getting some rules wrong and thus loosing money on fees, lawyers and the like. The job of a manager is not to be so awesome to make you rich quick, their job is to reduce the risk that you actually loose out (depending on the type of investment you prefer there might still be risk, but at least the dummy risks should be taken care off). – Frank Hopkins Dec 20 '19 at 3:40
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    @Frank Hopkins: For some of us, it's not even a matter of being good at it. I think that if I invested considerable time & effort, I could be reasonably good at investing. But I'd much rather spend that time doing things that I actually enjoy. Paying around 0.1%-0.5% on my investments is a small price for the free time and lack of aggravation. – jamesqf Dec 20 '19 at 17:34
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    @asgallant "paying for a managed fund is just a losing proposition vs buying index funds. " True, but irrelevant to the question at hand - both systems involve people being paid to invest money. – NPSF3000 Dec 20 '19 at 20:23
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If we accept all of your premises as true (they're not quite accurate, as noted by the other answers here), then it still makes sense for the investor to work with other people's money.

If an investor only works only for themselves, their growth potential is limited by the capital they have available.

If they choose to invest money for other people, now their growth potential is limited only by the volume that they are responsible for and the fees or commission that they charge (and some regulations). It's a similar principle behind borrowing to invest: you get access to invest some money that you didn't previously have, then keep a portion of the profits and give back the rest.

18

How can there be a profession where some person sits at a desk and trades or invests for somebody else?

If enough people want that service, and that service can be provided at a profit, then the market tends to produce jobs that provide that service. The same way that there is a job where people sit behind a blender and make strawberry-banana smoothies. Enough people want that service and do not want to do it themselves that they are willing to pay a premium for others to do it for them. If enough people have dogs that need walking and are willing to pay for it, a dog walking service will eventually appear.

If they are so smart and can predict the market so well, would they not long ago have invested their own money repeatedly

This is a false premise. I do not pay my account manager to make predictions of the market. Rather, I pay my account manager to (1) help me devise a reasonable strategy for meeting my goals given the resources I have at hand, and (2) implement that strategy for me. I have a dog that needs to be walked, and my account manager walks that dog for me. I'm willing to pay for that service, and the account manager happily accepts my money.

The first account manager I ever had, when I was fresh out of school, wrote down on a whiteboard: TIME, CAPITAL, RISK, and explained that every strategy had three basic elements: how much time do you have to achieve your goal, how much capital do you have available to invest, and how much risk are you willing to be exposed to, and that she could help me understand what the right strategy was for me given that I was 40 years from retirement age, in my first full-time job, and of moderate risk tolerance.

I wasn't paying her to manage my money the way she managed her own money! She was 15 years older than me, had far more capital, and her risks included things like "have enough to pay for kids college in 10 years" that I didn't have. I paid her to help me understand what my particular mix of time, capital and risk was, and how to structure a strategy that would meet my goals.

The entire job seems self-contradictory to me

That's because your beliefs about the job are incorrect. When you have correct beliefs, the contradictions will disappear.

If they are so smart and can predict the market so well, would they not long ago have invested their own money repeatedly in order to amass such a fortune that they would never have to sit and have this as a job for somebody else to make money with their supposed trading/investing skills?

You're describing Warren Buffett. He's one of the richest people in the world and could have stopped investing long ago with more money than he could spend in ten lifetimes. There are only a handful of people like that in the world. You are correct that account managers are not Warren Buffetts, but they are not supposed to be.

  • I think OP is thinking of hedge fund managers, not account managers. – Allure Dec 20 '19 at 8:02
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Suppose inflation is 4% and a good money manager can average 7%. And suppose that it's not too hard to get $5,000 (in today's money) to invest when you're 18. 20 years later, when you're 38, you'd have the equivalent of about $9,000 (again, in today's money). When you're 58, you'd have $16,300 saved up.

Let's try it another way, let's say you can invest $5,000 a year and never take any money out of your investment account. You start at 25, when you first become a competent investment advisor. Again, we'll assume inflation is 4% and you can make 7% and you don't spend any of your invested funds. Following this pattern, you'd be doing some other line of work until you're 40, sacrificing $5,000 a year to your investment portfolio, only to break $100,000 when you hit 40.

And here's the shocking part -- that $100,000 you have at age 40 is almost entirely just savings. The additional revenue you made by investing wisely is only about 25% of your portfolio value!

So your core error is the assumption that a good money manager or investment adviser could turn amounts of money that anyone can invest into life-changing amounts in reasonable time periods.

The role of a good investment adviser or portfolio manager is to tune the risk/reward trade-offs to meet other people's requirements and to make adjustments quickly and accurately when circumstances change.

  • The additional revenue you made by investing wisely is only about 25% of your portfolio value In fairness, you did assume a time frame of 15 years. Exponential growth accelerates the longer time frame is used; e.g. if we instead consider age 60 when one is about to retire, what numbers do you get? – Allure Dec 20 '19 at 5:54
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    @Allure Sure, but not getting any benefit, in fact getting a pretty sever detriment, until age 60 is a strong reason not to follow that path. – David Schwartz Dec 20 '19 at 7:25
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The problem with your theory is that you assume that if a stockbroker can't become rich from his profession then he can't be of any use to the investor. Then you equate that 'deficiency' with the selling of a scammy investment book. It's a faulty premise.

Very, very people who invest for a lifetime 'amass a fortune', be it on their own or with the guidance of a broker. With long term disciplined investing, one can accumulate a nest egg large enough to secure one's retirement and most likely, have something left over for the heirs. But a fortune? No.

At this point in my life, I'm among those least likely to defend brokers but they are beneficial to some people who have minimal financial literacy and possibly a lack the time for the endeavor. Brokers can provide advice on how to invest, grow and manage your money. They can provide educational materials, research, tax advice, education about and access to various types of investments, including hot IPOs.

I used full service brokers way back when I was out there slaying the dragon as a young pup with no time to learn about the markets. It helped to get me on the right track but I cut the cord when I got up to speed.

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    I'd argue that enough money to live comfortably on the income from it IS a fortune :-) And though I too started with a full-service broker, I soon cut the cord (see investopedia.com/terms/c/churning.asp) and did quite well just putting everything in mutual funds - another way of having people invest your money for you. – jamesqf Dec 19 '19 at 18:05
  • I wouldn't dispute your opinion but as a retiree with the same lifestyle as pre-retirement, it's just continuity. Not that I covet any but to me, a fortune would be the ability to have a nice home on the beach (5 to 10x the cost of my current suburban home) and other frivolities (a yacht, several months abroad, etc.?). Coincidentally, 30+ years ago I had a Fool Service Bear Stearns broker churn my account. This was pre-internet in a time when investors had access to a fraction of the info available today. He was impetus for my cutting the cord. – Bob Baerker Dec 19 '19 at 18:51
  • If you invest over a lifetime, then you should easily retire at least a millionaire (meaning over a million dollars in assets, not making over a million dollars a year). Even small, regular investments, starting in your 20's, will result in multi-million dollars in assets to retire with and then leave to your heirs. – Michael Richardson Dec 20 '19 at 15:53
  • A million dollars isn't what it used to be. Per the 4% rule that's about $40k a year in retirement which ain't bad but it's not living high on the hog. – Bob Baerker Dec 20 '19 at 17:33
  • What does it mean to "churn your account?" – Michael - Where's Clay Shirky Dec 22 '19 at 2:16
4

There are two big issues here.
・How much money do you need for your money to work for you?
・How long does it take to amass that amount?

How much money do you need for your money to work for you?

Let's assume a modest salary of $100,000 is desired. Not rich, but you could almost, sort of live in California.

If your investments return a stable 4% interest every year, then you could live forever by taking 4% annually. Your investments will no longer grow, but you'll have an income

100,000 / 0.04 = $2,500,000

So we need $2.5M in investments for a modest salary.

How long does it take to get there??

That depends on how much you had to begin with! The old saying "it takes money to make money" could not be more true than when it comes to investing.

But let's assume we're not born rich. Let' pretend we worked our butts off and somehow managed to save $10,000 by age 25 with no debt, so we can invest it all.
It's often said here that good investing will double your money every 7 years.
Following that, to get our $10k to $2.5(6)m, we need to double our money 8 times!

7*8 = 56 years!

That's a long time. You'll be 81 years old at that point! Plus this is all based on the assumption that you are good enough at investing to double every 7 years!

Not to mention, you also need to put food on the table and a house over your head for those 56 years.

So we now need money to increase our investment (gradually) and put food on the table. We need a job until we're rich
You have a marketable skill of being able to double investments every 7 years. You can turn that into a job!
You convince other people that you can double their savings every 7 years or so. Then they pay you money, and you take a slice of their profits. You live off that money and you invest more and hopefully you can get to your goal of $2.5M before you're 65!

How much do we need to be game-breakingly rich?

If we have this amount, we probably can't double our money without greatly affecting the market itself.
Let's throw out a random number for our definition of game-breaking. Let's say we need $1B.

With our initial investment of $10,000, we will need between 16-17 cycles of doubling our money to get there.

Years til game-breaking:
7*16.5 = 115.5 years!

So you need to live until you're 140 years old AND someone continue your streak of good investments without fail. Good luck with that!

3

There're many angles to your question which are problematic. Let's dissect them one by one.

How can there be a profession where some person sits at a desk and trades or invests for somebody else?

Why can't there be? Anything goes as long as people are willing to pay them. There're plenty of people making a living off things which others would consider completely useless. For example, take soccer. If you don't care about soccer, you would also never see the point of paying millions of dollars to 22 adults to chase a ball. But others do, and they pay. This allows those footballers to make a living.

If they are so smart and can predict the market so well, would they not long ago have invested their own money repeatedly in order to amass such a fortune that they would never have to sit and have this as a job for somebody else to make money with their supposed trading/investing skills?

You can be pretty damn sure they're already investing their own money. They don't need yours. That's why investing isn't like fixed deposits - you can just take all your money out and they'll carry on as usual.

Instead of asking this question, ask the reverse. Why should they help you? Does it matter to them if you don't know how to invest and lose money as a result? This is an especially pertinent question given the fact that the stock market is a zero sum game, and the more inexperienced investors there are in the market, the easier it is to make money.

Here's a quote from Warren Buffett:

If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

The point here is that he can make you 50% a year on $1 million, but he can't do it with $1 billion or $100 billion. The more money you have, the more you move the markets when you invest, and when the markets move, the less you are able to make. Therefore these people are taking on an active handicap by helping you. The more money you give them, the bigger the handicap.

In other words: you need them, they do not need you. Asking this question then is itself quite offensive.

So then back to the question of why they should help you. Try thinking of some answers yourself. I suspect that pretty soon, you'll be forced to the answer "because I will pay you". Once you're there, then things materially change for them. Yes, they are handicapping themselves by investing your money, but you are paying them, and it might still be a net positive for them.

The entire job seems self-contradictory to me, like somebody working hard every day to push a book on how to become rich quickly. It's obvious in that case that they aren't successful themselves, except in the sense that their book scam makes money by tricking the other people who hope to "also" become rich. Nobody who is actually rich and successful would be pushing a book containing the actual "magic trick" to this success, both because they wouldn't have to work (especially not with something non-rewarding like that) and also because it would be in their best interest to not mention this "secret trick" if they have somehow found it out themselves.

Be very careful with this, because there are scams and there are altruistic people. Go back to the question of why they should help you. Did you also consider "because it's altruistic"? There are indeed self-made millionaires who consider it desirable to educate others (and if you've read stories about destitute people who blew their life savings in bad investments, you might be sympathetic). It's not easy, there are people like you who question their motives. How would you react if you tried to help someone and they reacted with "why are you helping me instead of yourself?"

If you don't want their help, walk away, don't question their motives.


Here's also a brief answer for why those who are familiar with investing might still engage someone else to invest for them, and why these others might be willing to invest someone else's money.

  1. It's less labour intensive. To make serious money, one needs to follow the markets closely. Reading the news is necessary (which can easily be >4 times a day), not a luxury. One also must read annual reports, which are often hundreds of pages in dense legal text. Further, not every one of these investigations actually leads to a worthy investment. It's quite conceivable then that a person will just outsource this to someone else, to free up time for them to pursue their own interests.

  2. By investing someone else's money, they are presumably paying you. That means you have a stable income stream. It's possible to have a stable income stream from investments (e.g. via dividends), but a salary is likely worth more.

2

I invest money via a managed stock account. Why don't I invest directly myself? This is because I don't pay transaction fees when the bank buys or sells stocks. Instead I pay the bank a fee and the money paid in the form of that fee is much lower than what I would have paid in the form of transaction fees.

The question then is how the bank makes a profit by having me as their customer. The bank by having millions of people with a managed stock account, can avoid having to do transactions on the stock market. When you decide to put in money in your stock account or withdraw money and you see that the bank has bought or soled stocks, that doesn't mean that any stocks have actually been bought or sold.

The stocks shown on your account will therefore be for some part virtual stocks, it's nothing more than an obligation of your bank to give you the value of those stocks when you decide to sell them. At any time there will be many customers withdrawing money from their stock account and people putting money in. The bank will then simply swap the stocks of those accounts.

If more stocks are sold than bought, the bank doesn't have to sell the excess number of stocks on the stock market. If more stocks are bought than sold, then the bank doesn't have have to buy the difference on the stock market, there will then be an increase in the number of virtual stocks. If later more stocks are sold than bought, these number of stocks will go down again.

On the long term the bank will have to buy or sell stocks, but the number of transactions on the stock market will be a very small fraction of the total number of transactions involving stocks on all the stock accounts. This thus saves a massive amount of money in the form of transaction fees.

Another way the bank saves money is by holding a more speculative portfolio that is more profitable on the long run than the sum of the portfolios of all its customers. As I explained above, part of the stocks held by the portfolios of customers are virtual stocks. It is then an advantage for the bank to invest in a more speculative way that will increase in value more on longer time scales. Customers will on average opt for a more defensive portfolio, the long term difference between the performance of the real stocks the bank actually has bought and the (partially virtual) stocks shown on the accounts of its customers, is thus also a big source of profit for the bank.

1

One of the reasons for this is that successful investing generally requires diversification: investing in a variety of securities, to avoid significant losses if you have too much of your portfolio invested in a single company that goes bad.

Mutual funds are one of the most common examples where a professional invests on behalf of others. By pooling money from thousands of investors, a mutual fund can afford to invest in hundreds of different securities, so it's not so dependent on any single investment. In addition, they can take advantage of volume discounts on the stock exchanges, so their transaction costs are lower. And since they can afford to purchase large shares of some companies, they may also be able to influence the companies in ways that will increase the stocks' value, which individual investors might not be able to do, so there's a feedback effect.

If the fund manager tried to use their expertise to invest only their own money, they wouldn't be able to buy as many different stocks, so unless they're very lucky they won't do as well as they can for their customers.

Often fund managers will invest in their own funds, so they can share in the benefits they provide to the customers, on top of whatever they earn from their salary and share of investment fees. However, one should not necessarily infer that a fund is poor if the manager doesn't invest in it -- they might simply have different investment objectives than the fund (e.g. they might be an aggressive growth investor, but they're managing a conservatibve bond fund). It might be a red flag, though, if the manager invests in a competitor fund with similar objectives (I say "might" because it could just be due to their history -- the investments may have predated being hired to manage this fund, and it would cost them too much to switch).

0

Firstly:

Traders make money from information (this is why taking account of inside information laws is such a big thing in the industry, and why those laws exists). If a trader has more information in a sector than the general trading population then they should be able to make money off of the traders who have less information. For example, if you have a large number of people on the ground at farms around the USA collection data on the state of the corn fields throughout the year, you will be able to determine the supply of corn better than anyone else and so trade corn futures profitably

Secondly:

A trader that is good enough to earn enough money from trading that they quit working for someone else and start to trade using their own money is called a local

They exist, but it is an even more stressful job than being a trader with someone else's money, as generally if you screw up with someone else's money you don't have to pay them back. Brokers like to tell (non local) traders that a local has done a trade as a way to drum up business, as anyone good enough to be a local is really good at what they do.

0

The same reason any profession exists:

There is demand.

Let's say I have $100k in savings that I want to invest into the stock market, but I have no idea where to start, which stocks to buy, how to buy them, how to sell them etc. I'm at ground zero without a clue of what to do.

I have two options:

  • learn how to do all these things and study the market for long enough to understand it and have an idea of how it works and what to invest into (could take a few years for me to be comfortable with investing by myself)
  • hire someone with a good track record to manage the investment in exchange for some of the profits (no further investment of time or effort on my part).

A lot of people choose option 2.

P.S. a lot of people who practice this profession also invest their own money, it's not an either/or situation. If you're already spending time managing your own money for profit, why not offer to do the same for others for a cut of their profits?

0

This is like asking why a chef doesn't just make do with making their own meals at home.

They have a skill, so in addition to using it for themselves, they can make some money by using it for other people.

An investment banker may well invest their own money too. I'd be surprised to find one that didn't. But you don't make huge returns on modest inputs. You can't really live off investing unless you're already rich. So you need a job too.

when they're also using their talents to [hopefully successfully] invest other people's money too, they can charge money for that service. It's called… having a job!

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