How is the stock market NOT zero-sum?

[T50_Omaha8]

[ QUOTE ]
- an increase in productivity (all else equal) drives down current and future input costs, increases margins, andincreases the value of stocks whose productivity increased.

- a new product is released which benefits those who want to buy it and thus provides a revenue stream for the company (think google, MSFT, kraft, miller etc.)

- a new market opens up where new wealth is tapped for the benefit fo companies and shareholders (growth of emerging markets etc.)

[/ QUOTE ] What do the actions of any players in the game have to do with any of this? This stuff all happens whether you buy the stock or not.

The strategic interaction in this game has (essentially) no impact on the total value of the outcome. That's the definition of a constant sum game.

I'm not saying the stock market is pointless or anything. The "essentially" qualifier, when looking at the aggregate, is very, very important, since the mutlitude of price corrections that occur do actually shape the market. But for the ordinary investor, this effect is pretty much nil.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
- an increase in productivity (all else equal) drives down current and future input costs, increases margins, andincreases the value of stocks whose productivity increased.

- a new product is released which benefits those who want to buy it and thus provides a revenue stream for the company (think google, MSFT, kraft, miller etc.)

- a new market opens up where new wealth is tapped for the benefit fo companies and shareholders (growth of emerging markets etc.)

[/ QUOTE ] What do the actions of any players in the game have to do with any of this? This stuff all happens whether you buy the stock or not.

The strategic interaction in this game has (essentially) no impact on the total value of the outcome. That's the definition of a constant sum game.

I'm not saying the stock market is pointless or anything. The "essentially" qualifier, when looking at the aggregate, is very, very important, since the mutlitude of price corrections that occur do actually shape the market. But for the ordinary investor, this effect is pretty much nil.

[/ QUOTE ]

i don't understand your first two paragraphs. can you rephrase?

thanks,
Barron

[prohornblower]

because the stock market increases at a greater rate than inflation, I think of it like those who play the market should "always" gain, and those who don't (consumers who borrow), "always" lose.

The global economy should be zero-sum. But the stock market is positive sum.

Standard of living also always increases globally. But at the same rate, there are relative winners, and relative losers.

[ArturiusX]

I don't think anyones nailed it yet.

Stocks have a theoretical value that appreciates.

However, stock buying, trading, holding, whatever, in the practical sense, is very much zero sum.

[DcifrThs]

[ QUOTE ]
I don't think anyones nailed it yet.

Stocks have a theoretical value that appreciates.

However, stock buying, trading, holding, whatever, in the practical sense, is very much zero sum.

[/ QUOTE ]

can you elaborate on that last sentence?

the way i understand this part of the equation is that there can be benefits to both parties of a transaction since their goals can be different and thus the game is not zero sum.

Barron

[CrushinFelt]

Benefits shouldn't be counted as anything. Futures markets are zero-sum even though there are benefits (spreading out risk).

[ArturiusX]

[ QUOTE ]
[ QUOTE ]
I don't think anyones nailed it yet.

Stocks have a theoretical value that appreciates.However, stock buying, trading, holding, whatever, in the practical sense, is very much zero sum.

[/ QUOTE ]

can you elaborate on that last sentence?

the way i understand this part of the equation is that there can be benefits to both parties of a transaction since their goals can be different and thus the game is not zero sum.

Barron

[/ QUOTE ]

I was thinking in terms of what happens when the participants are ready to sell, for whatever reason. As we have an accumulation of wealth through share profits, dividends, or whatever, there becomes a point where different opportunities arise outside the stock that takes the attention of the investor. That investor sells his position. His selling then triggers a change in price, and either require someone new to buy the inventory, or price goes down, blah blah blah. Suppose by his selling, he influences another to make the same decision (or maybe the other saw the great opportunity and greenier pastures too). Suddenly, people are selling. Now, in terms of profitability, the company is the same, but the perception of what it delivers to its investors is differing. Suddenly, you have a swing, either because people see themselves losing money in the stock, or because they see the better opportunity. Price will keep going down until investors then percieve value to now exist again, either because the price is too low, or because of a change in the fundamentals of the company or whatever. People will buy in. What if the people buying in does no match the people selling? Someone gets nervous, sells out. Share price goes down. More panic ensues.

Eventually, looking way back before this started, when we had a nice uptrend in price, participants were buying towards the end of the bull run. Usually, first in is first out. They sell, at a loss, essentially giving up their profits to those who dove out initially.

When you're using a buy and hold strategy, you're trying to benefit from two phenomenon's that exists in the stock market, one being the re-investment will generally be in the same security, and the second being the greater fool theory, but with more safety.

When someone receives a dividend, they typically don't throw it on the bar tab. More commonly, they re-invest it in the same company. This in theory, increases the stock price, especially since everyone does it. Now, with an increasing price, more people may be attracted to this stock, especially if the fundamentals are solid etc etc. In other words, all proceeds and profits from the stock market generally go back into the stockmarket, which in turn feeds itself. This creates higher prices. You are re-investing money made from the company in the hopes the company will make more in the future. Players in the market are no longer investing in the 'invest in bonds' sense, they are now investing in the speculative sense. Further investment into a companies share will not enhance its opportunities in the future to create a greater revenue stream. The company doesn't get that money, someone else does, obviously (the person selling). This person is likely to again, re-invest that money.

The market now becomes more inflated as more people choose to re-invest, and re-assess their portfolio holdings. It becomes a giant wheel that self perpetuates, and although which spoke is facing upwards or across may change, its still driving forward because of the re-investment mentality. Obviously, we could think of complex examples of how different factors change this simple equation, but simplcity is nice.

The greater fool theory is just the bubble classic, where its ok to buy something at an inflated rate as long as someone else buys it later. By everyone investing a set amount of their income into stocks, it pyramids the money flow. The idea is that, if its a retirement fund, all this ups and downs from things like credit crisis's, dot com bubbles, and general speculation should even out. The buy and holder is exploiting the fact that future generations will also buy and hold, propping the market with more money.

The actual truth is, if any generation decided to stop investing, to stop putting money in, and a shift in culture occured, the market would crash, and a lot of people would go broke. You could argue the intrinsic value of the companies are still there, but so what? In practice, the return you'd gain would be poultry, mainly because the crash would kill your main money maker; taking advantage of the investment culture. If the company profits stay constant, you'd be entitled to those, but from your position, that is irrelevant, because the process you were banking on to retire or buy a house or whatever just faded on you. You were taking part in speculation the whole time, just a higher percentage, more solid, less finger nail biting speculation. You're speculating that our investing culture is going to stay the same way.

How does this relate to zero sum? Think about the investors net positions in the case of some weird shift in investing culture. Someone would ultimately profit the most from everyone else. Although you hold an underlying, money producing asset, the make up of everyones profit and loss at the end of the day should show a zero sum distribution. The underlying asset becomes irrelevant.

[Mark1808]

[ QUOTE ]
I don't think anyones nailed it yet.

Stocks have a theoretical value that appreciates.

However, stock buying, trading, holding, whatever, in the practical sense, is very much zero sum.

[/ QUOTE ]


If you buy a stock at 10 and sell it to me at 15 and I sell it at 20, who has lost our gain? No one, that is why stocks is not a zero sum game. Those that sold lost the opportunity cost of more gain but they did not neccesarily lose money.

The reason this is so is that there is no finite expiration date or settlement date for all holders as there is for options and futures. The company who originally issued shares is never going to have to go back in and buy all those shares back at a fixed date. If they did stocks would become a zero sum game as the issuing company's gain or loss would be offset by the gain or loss from market participants. Since their is no forced setlement of shares a minority trading of shares determines the percieved net worth of all market participants. Which is theoretical because not all holders can immediately sell at the current market price.

[Phone Booth]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
- an increase in productivity (all else equal) drives down current and future input costs, increases margins, andincreases the value of stocks whose productivity increased.

- a new product is released which benefits those who want to buy it and thus provides a revenue stream for the company (think google, MSFT, kraft, miller etc.)

- a new market opens up where new wealth is tapped for the benefit fo companies and shareholders (growth of emerging markets etc.)

[/ QUOTE ] What do the actions of any players in the game have to do with any of this? This stuff all happens whether you buy the stock or not.

The strategic interaction in this game has (essentially) no impact on the total value of the outcome. That's the definition of a constant sum game.

I'm not saying the stock market is pointless or anything. The "essentially" qualifier, when looking at the aggregate, is very, very important, since the mutlitude of price corrections that occur do actually shape the market. But for the ordinary investor, this effect is pretty much nil.

[/ QUOTE ]

i don't understand your first two paragraphs. can you rephrase?

thanks,
Barron

[/ QUOTE ]

He's saying that the total size of the pie is not dependent upon on the actions of the participants in the game. That is the definition of a zero-sum game.

You may have a point regarding expected utility as opposed to expected value, but that's true of poker, lottery and other gambling activities as well.

I mentioned this in another thread but what makes the stock market NOT a zero-sum game is actually the possibility of takeovers, insider selling/buying, stock repurchases and equity compensation for employees. The vast majority of trading, however, has very little to do with any of those.

[ArturiusX]

[ QUOTE ]
[ QUOTE ]
I don't think anyones nailed it yet.

Stocks have a theoretical value that appreciates.

However, stock buying, trading, holding, whatever, in the practical sense, is very much zero sum.

[/ QUOTE ]


If you buy a stock at 10 and sell it to me at 15 and I sell it at 20, who has lost our gain? No one, that is why stocks is not a zero sum game. Those that sold lost the opportunity cost of more gain but they did not neccesarily lose money.

The reason this is so is that there is no finite expiration date or settlement date for all holders as there is for options and futures. The company who originally issued shares is never going to have to go back in and buy all those shares back at a fixed date. If they did stocks would become a zero sum game as the issuing company's gain or loss would be offset by the gain or loss from market participants. Since their is no forced setlement of shares a minority trading of shares determines the percieved net worth of all market participants. Which is theoretical because not all holders can immediately sell at the current market price.

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I don't see how this is related to zero sum, it sounds like you're talking about value.