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> This is what happens when you play a zero-sum game. Even if you win, someone has to lose. How is it always a zero-sum game to win? Fundamentally, trading sto

by jeromec 16y ago

> This is what happens when you play a zero-sum game. Even if you win, someone has to lose. How is it always a zero-sum game to win? Fundamentally, trading stocks is not that at all. If I buy one of the first issued shares of "Tasty Ice Cream" for $1 because I want the company to spread their goodness as well as get a return on my money, no one has lost. If I lose my job the next week and need to sell my share which may be valued at $1.10 the person that buys has not lost, especially if he receives a dividend long enough to cover the $1.10.

lowkey 16y ago
I think this is the way capital markets were originally supposed to work; matching companies in need of growth capital with investors seeking to earn a risk-adjusted return on their long-term savings. Unfortunately, the financial markets have morphed over time such that now, traders trade for the sake of trading. Instead of our work being our wealth, trading securities somehow became an end unto itself. What's worse is that there really are two markets today: one for the individual retail investor and a second for institutional investors. Retail investors are taught to 'invest for the long-term', and 'not try to time the market' meanwhile hedge-funds and high-frequency traders play a different game with different rules. Their profits come primarily at the expense of retail investors and in many cases investment banks 'front-run' their own clients taking advantage of their customers in a way that would be illegal in any other industry. John Stewart explains it better than I ever could in his face to face indictment of Jim Cramer of CNBC: http://ccinsider.comedycentral.com/2009/03/13/jon-stewart-and-jim-cramer-the-extended-daily-show-interview/ http://ccinsider.comedycentral.com/2009/03/13/jon-stewart-an... (Link for the Canadians: http://watch.thecomedynetwork.ca/the-daily-show-with-jon-stewart/exclusive-interviews/the-daily-show-with-jon-stewart---jim-cramer-interview-uncut/#clip149637 http://watch.thecomedynetwork.ca/the-daily-show-with-jon-ste...)
- jeromec 16y ago
  For the most part I totally agree. Rampant speculation combined with a fiat currency and too loose regulation is how we got so much money sloshing around, a deformed market, and this economic crisis (and a near collapse of the financial system). We've gotten too far away from fundamentals. We also see this in startups. For example, I totally agree with Mark Cuban who laments that modern founders often look at valuations, and indeed raise lots of capital, for possible IPOs without even discovering how to profit a single dollar.
- mistermann 16y ago
  >Retail investors are taught to 'invest for the long-term', and 'not try to time the market' meanwhile hedge-funds and high-frequency traders play a different game with different rules. Exactly....that the financial services industry constantly advises the retail investor to "invest for the long term", when they do the exact opposite (while generally using the funds provided by these exact same retail investors), to me is a pretty strong indicator that the markets are something entirely different than how they are sold to people. The markets were created to provide funding for companies in need of capital, and a branch of the financial services industry was legitimately required to facilitate this process between companies and individual investors, but now almost everywhere I look people are focused on finding new ways to skim money out of the system, under the guise of "providing liquidity", as if there was some problem with liquidity 10, 20, 30 years ago.
illumin8 16y ago
This is only true for long-term investors. Algorithmic traders have no vested interest in whether the underlying business succeeds or fails. They are only there trying to predict where the wind will blow next. They are quickly in and out of any potentially profitable company; quick to buy "puts" in a momentary time of weakness or "calls" in a time of temporary strength. For algorithmic traders, it is indeed a zero-sum game. For the rest of us "investors", as I like to call it, to distinguish it from trading, there is potential for long-term good.
- wisty 16y ago
  Not really. For algorithmic traders, the transaction costs will dwarf the dividends, so it's really a negative-sum game. Unless there's a very small volume of algo-traders, and a large volume of long-term traders who just happen to be re-adjusting their positions while the game is being played.
nandemo 16y ago
It is a zero-sum game as long as you define it as follows: a trader's score for each transaction is (price paid - closing price). If Alice sells GOOG at $100 to Bob, and GOOG closes at $99 that day, then we say that Alice won $1 and Bob lost $1. That's all. Maybe 1 year later Bob will sell GOOG to Alice at $200, and the stock will close at $201. Again Alice won $1 and Bob lost $1. Of course Bob made a lot of money in the process, so the zero-sum game definition might sound arbitrary. However, as far as trading is concerned, the definition as zero-sum game is useful. If Bob were a better trader (more skilled or luckier) perhaps he could have saved $2. See The Winners and Losers of the Zero-Sum Game by Larry Harris. http://www-rcf.usc.edu/~lharris/ABSTRACT/Zerosum.htm http://www-rcf.usc.edu/~lharris/ABSTRACT/Zerosum.htm

by jeromec 16y ago

lowkey 16y ago

I think this is the way capital markets were originally supposed to work; matching companies in need of growth capital with investors seeking to earn a risk-adjusted return on their long-term savings. Unfortunately, the financial markets have morphed over time such that now, traders trade for the sake of trading. Instead of our work being our wealth, trading securities somehow became an end unto itself. What's worse is that there really are two markets today: one for the individual retail investor and a second for institutional investors. Retail investors are taught to 'invest for the long-term', and 'not try to time the market' meanwhile hedge-funds and high-frequency traders play a different game with different rules. Their profits come primarily at the expense of retail investors and in many cases investment banks 'front-run' their own clients taking advantage of their customers in a way that would be illegal in any other industry. John Stewart explains it better than I ever could in his face to face indictment of Jim Cramer of CNBC: http://ccinsider.comedycentral.com/2009/03/13/jon-stewart-and-jim-cramer-the-extended-daily-show-interview/ http://ccinsider.comedycentral.com/2009/03/13/jon-stewart-an... (Link for the Canadians: http://watch.thecomedynetwork.ca/the-daily-show-with-jon-stewart/exclusive-interviews/the-daily-show-with-jon-stewart---jim-cramer-interview-uncut/#clip149637 http://watch.thecomedynetwork.ca/the-daily-show-with-jon-ste...)

jeromec 16y ago
For the most part I totally agree. Rampant speculation combined with a fiat currency and too loose regulation is how we got so much money sloshing around, a deformed market, and this economic crisis (and a near collapse of the financial system). We've gotten too far away from fundamentals. We also see this in startups. For example, I totally agree with Mark Cuban who laments that modern founders often look at valuations, and indeed raise lots of capital, for possible IPOs without even discovering how to profit a single dollar.
mistermann 16y ago
>Retail investors are taught to 'invest for the long-term', and 'not try to time the market' meanwhile hedge-funds and high-frequency traders play a different game with different rules. Exactly....that the financial services industry constantly advises the retail investor to "invest for the long term", when they do the exact opposite (while generally using the funds provided by these exact same retail investors), to me is a pretty strong indicator that the markets are something entirely different than how they are sold to people. The markets were created to provide funding for companies in need of capital, and a branch of the financial services industry was legitimately required to facilitate this process between companies and individual investors, but now almost everywhere I look people are focused on finding new ways to skim money out of the system, under the guise of "providing liquidity", as if there was some problem with liquidity 10, 20, 30 years ago.

illumin8 16y ago

This is only true for long-term investors. Algorithmic traders have no vested interest in whether the underlying business succeeds or fails. They are only there trying to predict where the wind will blow next. They are quickly in and out of any potentially profitable company; quick to buy "puts" in a momentary time of weakness or "calls" in a time of temporary strength. For algorithmic traders, it is indeed a zero-sum game. For the rest of us "investors", as I like to call it, to distinguish it from trading, there is potential for long-term good.

wisty 16y ago
Not really. For algorithmic traders, the transaction costs will dwarf the dividends, so it's really a negative-sum game. Unless there's a very small volume of algo-traders, and a large volume of long-term traders who just happen to be re-adjusting their positions while the game is being played.

nandemo 16y ago

It is a zero-sum game as long as you define it as follows: a trader's score for each transaction is (price paid - closing price). If Alice sells GOOG at $100 to Bob, and GOOG closes at $99 that day, then we say that Alice won $1 and Bob lost $1. That's all. Maybe 1 year later Bob will sell GOOG to Alice at $200, and the stock will close at $201. Again Alice won $1 and Bob lost $1. Of course Bob made a lot of money in the process, so the zero-sum game definition might sound arbitrary. However, as far as trading is concerned, the definition as zero-sum game is useful. If Bob were a better trader (more skilled or luckier) perhaps he could have saved $2. See The Winners and Losers of the Zero-Sum Game by Larry Harris. http://www-rcf.usc.edu/~lharris/ABSTRACT/Zerosum.htm http://www-rcf.usc.edu/~lharris/ABSTRACT/Zerosum.htm