How is the stock market NOT zero-sum?

[ArturiusX]

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DesertCat, is your argument that both parties in a trade feel that they are both benefiting from the trade for different reasons?

If so, cannot the same can be said for poker? "A thinks his JJ has a +EV to call a preflop all in bet, and player B feels going all in is +EV with KK". There is still an overall winner and loser in each hand.

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His argument confuses timeframes. I'm sure everyone buying and sell during the dotcom bubble thought they were all benefiting. That is, if you look at the timeframe between 1997-1999. Everyone who sold made money, everyone who bought stocks made money.

[Mark1808]

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In the secondary market for stocks you do not have a zero sum game because there is no set settlemet date for the end of trading where all participants must settle up. I can buy at 10, sell to you at 15 and you can sell at 20. I made money and so did you, who lost money? Now if that original seller to me at 10 was the orginator of the shares sold to me at 10 and was made to settle up at 20 then you would have a zero sum game.

[/ QUOTE ] Let's look at all 4 participants.

Person A sells to person B at 10.
Person B sells to person C at 15.
Person C sells to person D at 20.

Person A begins with a share of stock and ends with $10.
Person B begins with $10 and ends with $15.
Person C begins with $15 and ends with $20.
Person D begins with $20 and ends with a share of stock.

Person A: +$10, -stock
Person B: +$5
Person C: +$5
Person D: -$20, +stock

Looks to me like it all adds up to zero.

The fact that the stock is worth more is meaningless, by the way. This was not a consequence of the "game," but of luck or incomplete knowledge, as the true value of the stock at the opening was apparently actually $20 times some discount factor.

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In the stock market the original seller A is never short stock. A company that issues shares is not short or minus stock, therefore the game becomes non zero sum. If the seller A were truly short or minus stock and had to cover at a certain point like options and futures you would have a zero sum game. This is not the way the stock market works.

If your example is all secondary trading and A was not the issuer then he bought the stock from someone and he is therfore not short.

[Mark1808]

[/ QUOTE ] No, because unwinding positions is redundant. You can simply come up with a scheme where everyone periodically unwinds their position with the original seller and simultaneously reenters at the same price. That way, the stock market is a series of zero-sum games, each of which ends at regular intervals. The entire series is still a zero sum game. There's no need for this convoluted scheme, of course, if you don't create this false distinction between cash and stocks.

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But the original seller (the company) is never short the stock and therefore never in theory or reality unwinds their position.

If the company originally offers 1 million shares at $20 and the stock goes to $30 you have an aggregate $10 million gain. The company did not lose $10 million by selling at $20 and watching the price rise to $30. Owners of that stock are in total up $10 million, hence a non zero sum game.

[KDuff]

Unlike futures, there is not a long for every short and there is an infinite time horizon to owning a share of stock.

[Phone Booth]

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Uhm, please read the sentence you're responding to again? I'm saying *change* in ownership does not intrinsically change the aggregate level of ownership. Since you're arguing that there's intrinsic value in ownership, all I'm saying is that that value is not created or destroyed by trading shares, but simply moved around.

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Who is arguing otherwise? I've consistently said that the value in stock ownership is created through the net assets and earnings of the underlying companies.

You keep trying to say that the stock market is a zero sum game because you think the act of selling a share of stock between two parties is a zero sum game, but you are narowly defining your definition of a stock market. Stock markets enable stocks to be purchased and held, and also allow the purchaser to capture value created by the underlying business while they hold those shares.

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And your contention that " if value will increase than it already has" is clearly wrong if you understand the concept of discounting future cash flows for time.

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Actually, time value of money is precisely what I'm referring to.

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No it's not. Because if you were referring to the time value of money you would say so, you wouldn't say something silly like "if value will increase than it already has" which is just a nonsensical statement. I think one of the problems you are having on this thread is you have difficulty rigorously defining what you mean. It's caused by either your arrogance or your general nittiness. I think being unclear allows you to focus your responses on immaterial nits so you can avoid having to respond to the real meat of anyones argument.

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If the discount rate (which is nothing more than the exchange rate between the same currency at two differen times) changes such that US$1000 (1/1/2007) = US$ 990 (1/1/2006), then the value of those future cashflows increased and so will the price. Likewise, if the government somehow decides to pay $1100 instead of $1000, that will have a corresponding effect. But I assume you know all this already, you were just confused for a sec.

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So now you want to define the time value of money as an exchange rate between the same currency at two different times? Go ahead, since it's a meaningless distinction and serves only to emphasize your general nittiness.

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Let's just say I spent time at a bulge bracket analyzing those complicated fixed income instruments that are causing trouble these days, okay? Oh yeah and I did study a bit of game theory, unlike most people who are talking about the meaning of zero-sum games.

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So you are saying you are fixed income and game theory specialist with no equity experience or understanding?

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You can infer more from other posts I've made here. I wouldn't egg on others about lacking fundamentals when you are confusing present dollars for future dollars and keep implying that two people can agree on the value of a share and the value of a dollar and exchange one for the other with expectation of economic profit.

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Feel free to put words in my mouth. When did I ever say two people would agree on the exact value of a share? They only have to agree that the price is beneficial to both. Ever heard of Adam Smith's invisible hand, or was that not taught between all your heavy classes in Halo and Tiger Woods Golf at Game Theory School?

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Either they disagree on the value of the share (in terms of expected future cashflow) or they disagree on the value of the dollar (in relation to future dollars; thus having a different discount curve). If you didn't immediately think discount curves when you brought that whole thing about the seller having other options, you're not thinking clearly enough about what it means to have other investment options.

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Once again my point has been that the stock market as a whole is a not a zero sum game. I think that's been proven over and over on this thread. Your very avoidance of that point is proof itself. You keep wanting to show that the sale of a share of stock between two parties is a zero sum game, and even though I don't care, I think you are wrong here as well.

Individual A sells a share of the total stock market index fund (TSMIF) to Individual B. Both A and B agree that TSMIF is likely to earn returns significantly greater than the risk free rate over long periods, but with the risk of market volatility that may produce lower than risk free returns over shorter periods. Both could win in this scenario.

Individual B wins because he's able to divert some of his personal savings earning interest at barely over the risk free rate into an investment that will earn substantially over the risk free rate, albeit with the risk of volatility. Since B is 25 years old and is purchasing TSMIF with the intent to hold until after his retirement at age 60, he's willing to take the miniscule risk that he will earn less than the market return during a 35 year plus holding period.
So he clearly wins.

This must mean individual A is the loser, correct? No, A is 55 years old and nearing retirement age. He no longer wants to shoulder as much volatility risk, so he is willing to accept slightly lower returns by selling some of his TSMIF to put into bond funds that have much lower volatility, at a cost of lower expected yield. So A is reducing returns, but increasing his portfolios utility because A is locking in the gains of the past 30 years and helping guarantee a reasonable living standard in his retirement, which has a huge psychological value to him.

Or... A is selling TSMIF because A has been offered the opportunity to invest in a private business that is earning much higher returns than he can expect from the market. So A is now a winner from both a financial net worth and utility standpoint.

Or... A has decided to pay off debt that has an interest rate higher than market return expectations. A is now a big winner because by paying off this debt he's effectively earning an interest rate that is essentially risk free and far higher than the available risk free rate, and higher than the market's perceived yield with zero volatility risk.

Or... A is getting married and buying a wedding ring and a house with the proceeds of selling his TSMIF. All utility baby, but priceless utility at that.

I could spend all day spinning examples, but the point is clear. The act of a stock transaction, while it can be zero sum, doesn't have to be. Both parties enter into the transaction believing it will be beneficial, if not directly in financial benefits, also in psychological benefits. Otherwise, no transaction would ever happen.

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I don't even have any energy to respond to such an absurd combination of ad hominem attacks and logical fallacies, especially when it's clear that you have an ideological axe to grind but you do realize that a game of rake-free poker has exact the same key properties as the stock market, insofar as your argument is concerned? If player A and player B play against each other and player A has outstanding investment opportunities player B doesn't have and player B loves losing money, then when player A takes all of player B's money, we end up with a positive sum outcome. Since this positive sum did not come from an external source and is dependent on the participants' actions (if player B took player A's money, we'd end up with a negative sum), this is a non zero sum game.

In short, I mentioned this before, but your argument ultimately comes down to a dollar (at various times) being worth different amounts to different people. Using that as an assumption, any zero-sum game can be made non-zero sum. I can also prove anything I want as long as I'm allowed to assume 1 does not equal 1.

[Chrisman886]

You guys are thinking wayyyyyy too abstractly.

The answer is that the stock market is a negative sum game. Marcel Link says it in his books. Alexander Elder says it in his books. The market is a negative sum game because of transaction costs. Commissions, SEC fees, etc. make that so.

[phiphika1453]

Is the value of stocks not determined by the number of shares available and the demand to own these shares?

Is this statement correct in any way?

The profits generated by a company increase the demand to own shares of their stock, but their profits are driving up demand to own the stocks; not the actual value of the stock.

[Mark1808]

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You guys are thinking wayyyyyy too abstractly.

The answer is that the stock market is a negative sum game. Marcel Link says it in his books. Alexander Elder says it in his books. The market is a negative sum game because of transaction costs. Commissions, SEC fees, etc. make that so.

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Anyone who thinks the stock market is zero sum does not have big picture mentality. They buy a stock and it goes down and they feel they have lost money to someone. The people you quote are trying to sell books, do you see Warren Buffett trying to sell a How to Buy Stocks book?

Lets take Google as an example to show how stocks are not a zero sum game. In August 2004 Google sold 19.6 million shares to the public at $85. Today those shares are priced at $674, that is an $11.5 billion aggregate profit from those shares. No one lost $11.5 billion, that should be abudantly clear to anyone.

For the same reason stocks are not a zero sum game, neither is real estate. Does anyone out there think real estate is a zero sum game with a loser for every winner?

[adios]

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Is the value of stocks not determined by the number of shares available and the demand to own these shares?

Is this statement correct in any way?

The profits generated by a company increase the demand to own shares of their stock, but their profits are driving up demand to own the stocks; not the actual value of the stock.

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Wonder if anyone/group ever takes a public company private because they believe the per share price in the public markets is too low? Wonder is anyone decides not to take a privately owned company public because they believe the public won't pay a price that reflects it's true value?

[Phone Booth]

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You guys are thinking wayyyyyy too abstractly.

The answer is that the stock market is a negative sum game. Marcel Link says it in his books. Alexander Elder says it in his books. The market is a negative sum game because of transaction costs. Commissions, SEC fees, etc. make that so.

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This is true in practice. Furthermore, one can make an argument that open market transactions on the whole lessen the value of public equity because insiders are net sellers.