Compared to an operating business (pretend it’s a subway franchise as most of the people on here can scrape enough money to own one)
subway franchise:
Will cost 100k + 300k financing. The SBA will give you favorable loans for this. You get good financial leverage.
Every sandwich you sell will net you like $4.
From that you have to pay wages, rent, and kickbacks to corporate.
you earn on every sandwich but the question is can you sell enough sandwiches to cover your costs. The more sandwiches you sell above the break even, the more money you will make on the same 400k initial capital base. You get operating leverage.
finally as your platform is built, you can hire people to do many of the jobs - providing you will managerial leverage.
The world can change and hurt your earnings (like the office building near you can close) but these are slow and often predictable. Often your costs will drop with those changes as well.
trading:
Start with 100k and get 400k buying power. Broker can pull your buying power anytime they want. Poor financial leverage.
Unlike sandwiches every trade doesn’t go in your favor. So not only do you have to worry about throughput, you have to worry about earning on every trade. Poor operating leverage.
Second, the world can change overnight. Your strategy can blow up on any day without a moments notice. As a result you can’t really build a machine like in the sandwich shop. Poor managerial leverage.
If you want to add a strategy, you have to do so within your current equity base. You can’t go borrow more money. You don’t get this additional operating leverage. Poor operating leverage.
It’s challenging to hire someone to do some of your tasks: you don’t get managerial leverage.
finally IQ matters a lot. You are competing in the smartest industry on the planet. And your competitors are better capitalized and have better systems and information than you. Industry moves at very fast pace.
the advantage to a trading business is liquidity, the lack of significant fixed investment, and very short feedback loop.
I run an operating business and a trading book: a shitty year in the operating business still makes some money. A shitty year in the trading book is a permanent impairment of capital that I spend the next year recovering from.
