If you had perfect knowledge of the stock market, how fast could you go from having 1 dollar to becoming the richest man alive? Assuming you are trading manually, so no high frequency trading.
The first step might be the hardest, here: Is there any transaction you could even make, for $1? I would expect that almost everything would involve either some sort of minimum transaction amount, some sort of brokerage fee, or both.
If you do a series of perfect transactions (like taking super risky but lucrative positions which all turn out in your favour), it won’t be long until prosecutors and securities supervisors will be after you, investigating you for insider trading.
Robinhood and several other online brokerages claim they will let you open an account with $1, and charge no commission. I don’t know if this works in practise.
This is, in fact, almost unfathomably complicated to answer but interesting just to think about because of the range of real-world problems that you will face that will add friction in accomplishing your goal. You will need to constantly switch strategies, switch vehicles, switch brokers, and switch counterparties to do this in a race against the clock. No matter how you do it, after you are done, you will realize that there was probably an even faster way you could have done it.
When you are very small, you have to find people who will trade with somebody who only has a dollar. Robinhood will let you open an account with no minimum balance and no commission trading. You will want to trade in “penny stocks” (which are actually stocks with prices less than $5). Fortunately you can trade penny stocks through Robinhood. However, your funds will have to deposit into the account before you can trade, so it might take a couple of days to start trading. So by day 3, you have a $1 account.
You can easily pick true penny stocks that go up 10x in day. Even with perfect information, manual trading won’t let you optimize this strategy but you could probably pick a big mover from the morning and another big mover in afternoon, or a few different ones over the course of a day as needed. Thus, in the first few days, you can probably increase your portfolio by a factor of 100x every day. So, from Day 3 to Day 6, you are up to $1,000,000.
Even at just $1 million, you will have to switch strategies from the very smallest stocks with the biggest percentage moves to stocks where an ordinary block (100 shares) is big enough to make some actual difference in your bottom line. After all, as a millionaire manual trader, your attention is worth more than the pennies to be gained from a 10x move in 1000 shares of a stock trading at $0.001. Still, 7% moves in a meaningful stock that is leverage 50% (or a couple of them as necessary) each hour of the trading day means that you are still doubling your money each day. So, days 7 to 10 see you go from roughly $1 million to $16 million. You may hit your first hurdle somewhere here (or soon) though - will Robinhood’s compliance systems flag and freeze your account because (true or not) it will look like you are trading on inside information? If so, your timescales are…paused. Worse yet if the SEC starts distracting you with an insider trading investigation.
In any event, congratulations, you are now a Large Trader under Exchange Act Sec. 13h and you have to register with the SEC. Don’t worry, this is a small burden that takes a little time after trading hours but doesn’t slow you down too much and you can keep trading for a little while without it.
When you are a medium size account at $16 million, options will make a bigger impact than equities. You will need to be approved for that, which will probably take a day (so Day 11) but now you have regained the volatility you need to maximize your earnings - briefly. With perfect foresight, some option trades could get you 20x in a day (or more, there’s no particular limit, but there is also no guarantee that the day you start trading will have a any contract that does, let’s say 100x, or that it will trade in sufficient volume for you to go all in on that contract. Let’s assume you can go 20x on Day 11 with options. Now you have $320 million.
At this stage, one issue you are going to face is whether the internal systems of the broker-dealer will react quickly enough to your growing account equity to allow you to maximize your trading strategy. That is, will the systems be set up to allow a guy who had $1 million in equity in the morning to trade contracts of $20 million later in the day? I would not be surprised if you tripped internal circuit breakers a time or two that meant your current broker wouldn’t execute your trade even though you theoretically had the necessary capital. Again, more friction to deal with.
If you can find enough volume in the options you want to trade, maybe the next couple of days give you another 20x, so you make it to $6 billion. However, you start hitting limits you might not anticipate, and which even perfect market foresight won’t tell you. When Robinhood traders starting bossing around Gamestop stock a few months ago, the Depository Trust Clearing Coporation effectively limited Gamestop’s customers’ ability to trade the stock. If you single-handedly start upping your options trading so much at one broker, the Options Clearing Corporation might start imposing the same types of limits. At this stage, you are going to have to start moving your money around to other brokers. That is more friction. Opening new billion dollar brokerage accounts requires more background checking than opening up new $1 accounts. The know-your-customer and anti-money laundering checks will be considerable. You will need to explain in a way that satisfies new brokers how you got $1 billion in a couple of weeks that doesn’t sound like “I commit massive insider trading.” How long does this take to sort out? Also, did you ever get that Large Trader ID? Because you aren’t getting anywhere with these BD’s without it.
Even getting this sorted out only allows you to pull a billion or so out of the options market every day by trading manually. Your trading is so large, there is no particular way to hide it in the public markets. Furthermore, we now have a definitional problem from your original question. You said all manual trading but no high-frequency trading Does “HFT” include block trading algorithms? When you trade large blocks of stock, broker-dealers don’t just enter a market order for 10 million shares and call it a day. That would tank the market. The only way to execute large trades like that without disrupting the market is to use computers to break it up into smaller trades that can be executed over time by waiting for traders who want the other side of your trade to show up. Are those execution algorithms :“HFT” within your definition?
Maybe you decide day trading isn’t the thing for you anymore, so you will take larger longer term bets in companies. Naturally, this will slow down your turnover and reduce the internal rate of return on your investments. It may also trigger another issue. If you are taking billion dollar positions in $20 billion companies, you will have to file reports about your positions with the SEC under Exchange Act Sec. 13(d).
You might find that continuing to exploit your perfect information requires moving up to the instruments the big boys use - Swaps. Swaps are a type of derivative whose value is derived from the value of other instruments. Since you have perfect information about the stock market, you would likely want to trade swaps in single-name securities or swaps that are tied to narrow-based securities indexes. You might venture into credit default swaps if you have enough information to know things like whether a particular company’s tanking stock price will also cause it to default on its loan covenants.
To trade in swaps, you will have to negotiate master agreements, credit support annexes, etc. with those big boys (Goldman Sachs, Credit Suisse, Nomura, etc.). Just finding the lawyers who will take you on, explain this to you, look out for your interests, not be conflicted out, etc. will probably take a least a couple of months. And then you have a couple of months of explaining to your counterparties how you got your billions without using inside information or stealing it from the Treasury of a third-world country. Finally you will have to negotiate with counterparties who want to take on the risk that you are selling. Even if you have a reputation as a perfect trader, there are still people who will take the other side of the deal. They will assume they can sell the risk to other counterparties who don’t know that are, in effect, trading against you. However, the prices your counterparty will give you won’t be as good as you could get in the public markets, so these middle-men who allow you to execute on your strategy more effectively will also reduce the profits you can make. Your counterparties will also add uncertainty about your ability to profit at all because if they go bust (and trading against you, they might) their contracts will be worthless. If you want to become the richest the fastest though, these types of contracts are probably a necessary evil.
Don’t forget, if this takes long enough and you start a new calendar year, you will have to pay capital gains taxes on all of your gains - short term, at ordinary income tax rates. I hope you don’t mind losing 37% of what you made to Uncle Sam. Fortunately, you will be making so much on your gains that this will barely be a hiccup. You will have made multiples of your tax obligation by the time the check is actually due to IRS.
Long story short - the more you make, the harder it will be to keep increasing at the same rate over time.
From a certain point on in the post just before I reckon it would be easier to just buy a majority in one of the Big Boys. Then they will execute your orders with less fuss. Just keep the rest of the company as it is and make them open a new department called “I ME MINE”.
If we take the question to be about all financial markets in general, not specifically stocks, and take a broad enough interpretation of “perfect knowledge”, then you might be able to use your perfect knowledge to mine cryptocurrency extremely efficiently. That’d require an initial outlay of 0$, beyond the computer and internet connection that you probably already have, plus some free software. And it’d make it a lot easier to explain at least the first step of your rapid rise: You can mine cryptocurrencies on an ordinary PC, and while you’re extremely unlikely to beat the dedicated miners that way, it’s still possible to win the lottery, and there are probably a few hobbyists already who do.
This has me wondering: Is it possible for someone to be charged and convicted of a crime solely on the basis of improbability? That is to say, the Feds have no evidence that you are doing insider trading, but get you convicted in court anyway on the basis of “your Honor, he just couldn’t have pulled off all that legitimately, the odds are one in a trillion?”
Or, could the SEC ban you from trading, even if you aren’t guilty of a crime?
You can certainly be convicted based on indirect circumstantial evidence.
However, I think that the circumstantial evidence would need to support some coherent underlying theory of the crime. If (say) the accused had the requisite skills and access to some key computer system that would allow them to place illegal trades, but their actions could not be proven by direct evidence, then I think showing a serious of trades that are impossibly successful by any normal means would carry a lot of weight as circumstantial evidence.
But here we’re talking about a scenario where the success is based on magic, so there is no underlying theory of how a crime led to the trades? We’ll need to consult a lawyer who practices in this magical jurisdiction.
I won’t speculate about all possible crimes and circumstances but I don’t think that a prosecutor could get an insider trading conviction based solely on the improbability of a person’s trading success. One of the elements of insider trading is that the person has to have traded in violation of some duty of confidentiality owed to someone else. As a practical matter, prosecutors would not be able to demonstrate that the trader had any inside information, let alone that the trader was obligated to keep the information confidential.
Our hypothetical posits a guy trading his own money for his own account. The SEC can stop people from trading for others but it could not ban him from trading his own money even if he was guilty of a crime.
This is just adding epicycles.
First, the biggest banks are basically worth as much as even the wealthiest person in the world (Goldman Sachs market cap is $130 billion, vs. $200 billion net worth for Jeff Bezos), By the time you have the money to buy a giant bank, you’ve already basically achieved the OP’s goal and you don’t need the bank anymore.
Second, it’s not easy to take a controlling interest in a bank or broker-dealer. The primary regulator for the bank (usually the Federal Reserve) will review and must approve bank acquisitions. If it results in the change of control of a broker-dealer, FINRA will also have to review and approve it. So now instead of trying to convince Nomura that you aren’t a crook, you have to convince the Federal Reserve.
Third, in order to have the liquidity to buy the bank, you need to have your money in the financial system, which means convincing the banks that will handle your cash that you aren’t a crook or blood-diamond soaked warlord. That puts you right back to square one.
Epicycles is a nice image, there is some truth to that, but I reckon you don’t have to stay within the US system. Not suggesting Russia, but Lithuania, Denmark, Hungary perhaps. That would be cheaper. The German Commerzbank is absolutely respectable and able to trade big volume and has a market capitalisation of just 8,24 Billion Euro. 3 to 4 Billion will buy you a controlling stake, I reckon.
But you did a hell of a job outlining the obstacles to the interested layman. And with entertaining style to boot.
Thank you for a whirlwind tour of Bigger by The Day: Money Edition.
What a great informative post, thanks for taking the time! We don’t have to pay for reading that, do we?
If you live in a jurisdiction where it is legal to bet on the stockmarket, that’s easy. Get from 1 to 100 or 1000 dollars at the bookies, then move to a trading platform.
I think people are being unfair to the hypothetical. The question, as I read it, is how fast could one get to (let’s say) $200 billion, if every day he made the best possible trade, starting with one dollar. Let’s not take him down SEC rabbit-holes without at least helping him make a guess at that. I thought we loved silly (but thought-provoking) questions here.
I’m not equipped to figure it out, but I wonder if we could look at each day’s average top gainer by percent, and then just calculate that as a daily return over 235 days/year? I read the OP as forward looking, so no Biff’ing with old copies of the Financial Times. I also think, just to keep it sane, we look only at shares on major US exchanges (NYSE, NASDAQ, etc)?
I’m not sure the question of fastest possible can be answered. Add in options and the like, or shorting, and I can’t even begin to guess.
However, playing with Excel, it looks like a $1 present value, with a 10% daily return, gets you to 241 billion after a mere 275 trading days.
Well, he’re I think maybe you’re fighting the hypothetical. The way I read the OP, it’s very much concerned with the practicalities of what you could and could not do. Maybe we can set aside legal and regulatory issues, but once you get into the tens and hundreds of millions, market liquidity precludes putting any significant proportion of your capital into one day trade on anything but the biggest stocks.
Several points -
As mentioned, when you get too big you attract attention. Basically, IIRC (IANAStockmarketer) if you want to buy more than 5% in any listed company, you must register with the SEC, announce your intention, etc. This prevents surprise and stealth takeovers, where you buy out a decent stake before shareholders figure out there’s someone looking to buy it all and the price goes up.
Also, what’s the plan for those days where nothing significant goes up? Ride it out, or dump it all for cash before the bear hits? Dumping $100M of prime winning stocks will definitely have an effect on the market. Plus, the market is not that stupid (except, the subprime guys). Dumping millions of dollars of a stock will depress the price, adding to the loss you can expect.
At that point, too, you will become the “golden boy” and can expect others to mimic you, thus aggravating the situation amplifying swings. Depending on whether your magic can account for this, you become Heisenberg - either the dealer or the physicist - where your interaction affects the results. If you are a time traveler using old newspapers, then we get into the whole “are you following pre-ordained history, or making a new branch?” by interfering in the market?
So, I’ll concede that there are some practical elements that I hadn’t considered- if you’re just rolling over your nut, at some point the amount you’re moving will be material to the market caps of the stocks in which you’re trading. Indeed, at a few hundred million you’d be buying a controlling stake in a lot of the (generally smaller) top gainers. So yeah, agreed that you’re not just rolling one fat trade/day.
However, I still think (and will admit I was wrong if the OP says so) that the OP wasn’t concerned with the question of whether the authorities would come a-calling.
And even if that is in-bounds, nobody’s even taken a stab at how fast it could be done.
It’s been a bit since my fiance classes but if I remember correctly there is a way to bet the swing in commodity prices daily. You can even use leverage multipliers so you get day say 10x of the price of gold swing. I doubt you could buy in at $1 but once you got to $100 or $1,000 you’d be fine. My vauge memory is that you can double up each day which would mean you could get to $100mm is 20 trading days. At that all the stuff above kicks in. Within your first month in the market you’d probably be able to skip a lot of reporting and notice.
From then on you’ll be doing it the slow way. Which means your probably limited to 20% per year just due to the diversification you’d have to do to put that much money in and out of market without moving it yourself so you’d be looking at another 45 years from that point to get to $400B