Trading Lessons from the Most Notorious Business

There really is no business quite like the health insurance business ๐Ÿฅ๐Ÿ’ฐ.

There really is no business quite like the health insurance business ๐Ÿฅ๐Ÿ’ฐ.

It can charge you up to $25,000/year for family coverage and literally provide you nothing in return except a once-a-year check-up and a blood test ๐Ÿฉบ๐Ÿงช. It is truly the perfect business model. It collects money every month ๐Ÿ’ธ. You can never cancel it ๐Ÿ›‘. And it rarely has to pay out any claims, making it the easiest $40 billion of profit in all of the American economy ๐Ÿ‡บ๐Ÿ‡ธ๐Ÿ’ต.

The health care insurance companies may be the scummiest businesses on earth, but they are also brilliant at what they do, and we as traders can learn a lot from their tactics ๐Ÿ“ˆ๐Ÿง .

The first thing insurance companies always do is capitate. This is a fancy word for placing risk limits ๐Ÿšซ๐Ÿ’ธ. Basically, no single individual is an uncapped risk. Every policy comes with a hard money stop so that no one chronically ill person can bleed them of their capital ๐Ÿ’‰๐Ÿ’ต. Usually, most health insurance policies stop payouts after $1 million dollars ๐Ÿ’ฐ. Most of us, of course, have no idea that this exists because fortunately, most of us will never accrue such large medical costs. But you can be sure that the guys on the other side of that trade know their limits, and we should all keep that lesson in mind next time we are mindlessly plowing money into a losing position hoping that it will recover ๐Ÿ“‰๐Ÿ’ธ.

But if stop losses are the foundation of the insurance business, their most important business practice is discrimination โš–๏ธ๐Ÿ”. Yes, no one discriminates quite like the insurance companies. If they had their druthers, they would only offer policies to 35-year-olds who rarely get anything more than a cold ๐Ÿคง, have no history of surgery or illness ๐Ÿฅ, and take zero prescriptions ๐Ÿ’Š while happily paying them $20,000 a year for essentially โ€œpeace of mindโ€ ๐Ÿง˜.

Until they were forced by law to stop it, insurance companies were the greatest discriminators in the world ๐ŸŒ๐Ÿ“Š, using reams of data analysis to approve only those customers who were never likely to get sick ๐Ÿค’. In short, insurance companies always look to make as many โ€œwinning tradesโ€ as possible ๐Ÿ†๐Ÿ“ˆ. They do this by walking away from even the slightest threat of risk ๐Ÿšถโ€โ™‚๏ธโš ๏ธ.

Scummy or not, health insurance companies are masters of controlling their environment by relentlessly discriminating against risk ๐ŸŽฏ๐Ÿšซ. We can certainly question the morality of their tactics, but we canโ€™t ignore the effectiveness of their approach. Since the only thing we traders ever kill is money ๐Ÿ’ต๐Ÿ’€, adopting their methods wonโ€™t compromise our values but almost certainly will improve our results ๐Ÿ“Š๐Ÿš€.