Advertisement

What Trading Places teaches you about market efficiency

The 1983 comedy starring Eddie Murphy and Dan Ackroyd is good reminder of why investors should always keep a level head, says Matthew Partridge.

908-Trading-places-634
DT6XJR

Credit: AF archive / Alamy Stock Photo

Trading Places is a 1983 comedy starring Dan Ackroyd and Eddie Murphy (pictured), and Jamie Lee Curtis. The Mortimer Brothers, who own a commodity brokerage, decide to settle an argument about nature versus nurture by having their star trader, Louis Winthorpe III (Ackroyd), framed for theft, and replaced with homeless conman Billy Ray Valentine (Murphy).

Advertisement - Article continues below

While Winthorpe goes into a drunken spiral, Valentine adapts to his new role. But when he overhears the brothers planning to fire him, he teams up with Winthorpe and a prostitute (Curtis) to bring the Mortimers down.

The key moment

Having bailed Valentine out of jail, the brothers bring him to their office to teach him how their business operates. They explain that they carry out trades in several commodities, including orange juice, wheat, pork bellies and gold, for clients. However, because they get their money through commissions on each trade, the firm profits irrespective of whether their clients win or lose. Grasping the model immediately, Valentine says: "Sounds to me likeyou guysare a couple ofbookies".

Lesson for investors

The idea that financial markets are a form of gambling is a favourite insult of those who dislike them. Yet it's not a bad analogy, nor necessarily a negative one. After all, betting odds are usually reasonably correct as to the probability of an event happening otherwise bookmakers would rapidly go bust. Similarly, markets are capable of very accurate judgments.

However, just as gamblers on a streak can behave irrationally, creating opportunities for more level-headed punters, markets also regularly lose touch with reality.

Other financial wisdom

Also in 1983, two real-life traders, Richard Dennis and William Eckhardt, had a similar bet about whether trading could be taught. Dennis selected a group of people from all walks of life, who he dubbed "the Turtles". After several weeks of trading lessons, mostly focused on trend-following techniques, he gave them some money and let them loose.

While the group had mixed success, some were extremely successful, most notably Paul Tudor Jones (now worth an estimated $4.7bn). This suggests that, while some skills (such as discipline) are innate, it is possible to improve your results by reading and taking advice on the subject.

Advertisement
Advertisement

Recommended

Visit/trading/600685/trading-catch-this-coach-company
Trading

Trading: catch this coach company

Bus and coach operator National Express has expanded into promising markets abroad – and it looks cheap
28 Jan 2020
Visit/investments/investment-strategy/601443/what-the-future-of-dividends-means-for-investing
Sponsored

What the future of dividends means for investing

SPONSORED CONTENT - Facing the new challenge for income investors.
5 Jun 2020
Visit/trading/spread-betting/601432/spread-betting-five-tips-for-would-be-traders
Spread betting

Spread betting: five tips for would-be traders

Spread betting stocks can be tempting – but for many, it’s ruinous. Michael Taylor of Shifting Shares looks at how to avoid the pitfalls.
5 Jun 2020
Visit/economy/uk-economy/601461/a-little-bit-of-good-news
UK Economy

Good news at last – household debt is falling fast

Thre's not much good news around at the moment., But the fact that UK households are paying off debt at a record rate must surely count, says Merryn S…
4 Jun 2020

Most Popular

Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020
Visit/investments/stockmarkets/601460/disease-rioting-and-mass-unemployment-so-why-are-markets-soaring
Stockmarkets

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
Visit/economy/eu-economy/601463/why-a-stronger-euro-is-good-news-for-investors
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020