Investing stock market zero sum game definition

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The added value is reflected in dividends, capital appreciation of the share price, or a mix of both. You have one more argument that this is not a zero-sum game: the Fed and all global central bankers keeps on printing more USD. The stock market goes mostly up, except for a few down years. The productivity gains make us increase output and living standards. In the long run, the stock market has risen about 0. Most of this gain has come from the overnight edge , ie.

If we include slippage and commissions, it gets pretty close to a zero-sum game. This is why we always label short-term trading as a zero-sum game on this website. If we include trading biases and behavioral mistakes , you become easy prey for the vultures further up the food chain. Long-term investing and zero-sum games Before costs, beating the market is a zero-sum game.

Everyone who is active, those not indexing, is collectively a big index fund, on average. This group is active and incur both transaction costs and management cost, perhaps a couple of percent is being drained from the pool annually. The passive group pays much less in costs, thus the active group is at a disadvantage from the start. Thus, long-term investing is a zero-sum game if we compare it to an index. This is also proven by the fact that most professional money managers fail to beat their benchmarks.

That is expected, of course, because as a group not all can get better returns than the index. There are winners and there are losers compared to the benchmark. Hence, you practically end up with a negative-sum game in relation to the index. Zero-sum markets and short-term implications There is practically only one way to succeed in a zero-sum market: you have to make sure you are not the prey but the predator.

The only way to achieve that is by being prepared and always willing to learn and adapt. Make sure you understand the market and its players. Who are the competitors? Who are the predators? What is your trading edge? Trading and investing: zero-sum game implications Now that we have defined the different markets and confirmed that the stock market is a zero-sum game, you might wonder what is best for you: Trading or investing — what is best?

Clearly, in the long run, the stock market drifts upwards due to inflation and earnings growth via increased productivity. The Stock Market is A Vehicle of Efficient Movement of Capital When people think of trading stocks they think of it being a constant struggle of always trying to sell a stock for a higher price than they bought it for.

Its in order for companies or people with great ideas to increase happiness and efficiency go in order to gain access to capital. This capital then creates a runway for the company to realize those gains. Take Tesla as an example, while the stock valuation may have gotten out of hand the amount of social good the company is trying to achieve is far better than a world without Tesla. It may also be true that Tesla will crash into the future because of its massive overvaluations and there will be losers as a result, but overall if you look far enough into the future the value will be there.

Some may get disillusioned as they see massive amounts of money evaporate, but they were essentially buying the future, now whether they want to wait around to see it return to them is another question. Not only are there endless reasons why a stock may be undervalued, but human emotion also plays a role. Human emotion may be the main reason why people believe the market is a zero sum game.

When a stock is falling and a company is evaporating money its logical to panic and sell. While it can be hard to stomach that is probably the worst thing an investor can do. Selling at times like that will force a company to make up for that loss in efficiency.

In the case of companies with cash on hand, they can buy back stock in order to take advantage of this newly created inefficiency. This will in turn put cash back into the economy where it can be efficiently distributed to those providing the most value. Back in My Poker Days Its very interesting to see the similarities in value creation in poker compared to the stock market. While Poker is in no way a win-win for all players involved there can be value created for those who seek it. What I mean by this is if you are making a player feel great and have a good time, then he will keep adding money to the table, this in turn will create a situation at the table where more people can benefit.

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