Who Will Profit Off the Next Crash?

Current debates about stock valuations resemble the arcane meditations of medieval monks. But the real drivers are more mundane. Traders, weaned on tales of financial derring-do like "The Big Short," want to be the ones who profit from the next crash. The problem is that it may be easier to predict the crash than to profit from it.

To make money from a decline in prices, you can sell short, buy put options, or switch from risky to defensive assets. Success requires an accurate estimation of the timing and amplitude of any shift in valuations. You need to forecast the asset classes and markets that will be affected as well as vectors of contagion. You must anticipate whether the adjustment is in prices or in second-order elements, such as volatility or correlation.