**April 2021** ## Roles in the Capital Formation Process 1. Speculators offer liquidity 2. Investors offer capital Financial Intermediaries' role is to aid the capital formation process by creating financial products to increase financial intermediation. These institutions cater to their clients and there is an inherent conflict between their clients: companies desire capital whereas investors seek [[Uncertainty|certainty]]. Therefore much of what financial intermediaries do is filter companies for the most stable and certain prospects and then market them as such to investors. This conflict tends to create an inherent timeframe mismatch where the companies seeking capital naturally have a longer timeframe than most investors providing capital. The financial intermediaries try to bridge this gap by making the capital appear permanent for the companies and appear liquid for the investors. ## Human Nature The problem comes when investors and speculators confuse each other for themselves.  People are always seeking certainty in everything they do especially when it comes to money.  The financial services industry creates products that help the capital formation process by selling certainty to investors.  The whole industry is built on the idea of trusting experts who can reduce the uncertainty of the markets.  Investing is an act of [[faith]], but people are short on faith and trust and tend to opt for products that give them the illusion of safety and certainty.  This creates a reflexive system where capital is always moving around from perceived safe havens to whatever fad is most popular.  This is not good for the investors or the experts in the financial services industry and ends up making long-term investors increasingly short-term focused. ## Trust [[Trust]] is central to the financial system and trust is directly influenced by [[Time Value of Money|timeframe]] and [[liquidity]].  It is much easier to trust someone for a shorter period of time or in a vehicle where I can get my money out quickly.  But no one can make money if you only give someone money to manage for a day.  So we create structures and vehicles to try to thread the needle.  Only, the markets are a closed system and you can’t destroy [[risk]], you can only transform it.  So the more we repackage things the risks end up being concentrated on one actor’s balance sheet.  This is how Archegos blows up with the market at the highs.  They had to take extremely leveraged risks in a small number of names to accomplish whatever they were trying to do.  It was a very fragile structure and it broke.  This is what happened last year with the REITs in March and in 2008 with the GFC. ## Signal versus Noise ## Shortening the Feedback Loop ## Reinvesting [How I misapplied my trader mindset to investing](https://moontowermeta.com/how-i-misapplied-my-trader-mindset-to-investing/) ## Timeframes [[Time Value of Money]] ## Hedging [[Hedging]] ## Market Making is a Trading Business Large sample size and short feedback loop. ## Trading is short-term investing **Cases:** - [CHG Issue #130: Discerning Experts ](https://cedarshillgroup.substack.com/p/chg-issue-130-discerning-experts) - [CHG Issue #50: Timefames](https://cedarshillgroup.substack.com/p/issue-50-timeframes) - [[CHG Issue 36 BWIC]] - [[CHG Issue 16]] Explore Further: [[Short-Term Trading]] | [Moontower: Trading vs Investing](https://moontowermeta.com/trading-vs-investing/) Tags: #seeds