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> One of the biggest misconceptions is that the stock market is a zero sum game. Its absolutely not. No, it's by definition a zero sum game. Fundamentally, ow

> One of the biggest misconceptions is that the stock market is a zero sum game. Its absolutely not. No, it's by definition a zero sum game. Fundamentally, owning shares in a company grants you rights to a fraction of all future company earnings. For any given stock transaction: - there's an agreed upon price, $X - there's a true value, $Y, which equates to the net present value of all future company earnings that the transacted shares give you access to - if $X > $Y, the buyer is the loser in the transaction and the seller is the winner - if $Y > $x, the buyer is the winner; the seller the loser You may not know what $Y is in any given transaction, but the value certainly exists. And, therefore, a winner and loser exists in every transaction (even if you don't know who it is). Furthermore, the "amount" won in a transaction is always equal to the "amount" lost by the counter party. This value exchange is abs($Y-$x). If all individual transactions are zero sum, it should be obvious that the sum of all individual transactions are zero sum. As you call out in your examples, it's possible for individual (and groups of) participants to come out ahead. But, this is certainly at the expense of other participants in the transaction chain.

msdrigg 5y ago
I think the breakdown in this argument is the fact that $Y is not the same for everyone. > $Y is the net present value of all future earnings. First of all, ‘future earnings’ is a time-dependent probability distribution and this means that the outcome is not certain at the time of transaction. For example, we can imagine that a particular stock has a 50% chance of tripling in value after 10 years and a 50% chance of going bankrupt. What is the current value of this stock $Y. Even in this contrived case it seems like different people could value this stock differently today even knowing the probability exactly. Some investors need a reliable fixed income from their investments but don’t care much about growth (for example some retirees). They might not like this risk. Other investors want to increase their capital and are willing to risk volatility and losses. There are some cases where there is a clear zero sum game (pump and dump schemes for example), but I don’t think this is true for most transactions.
- fairity 5y ago
  Yea, I guess the fact that parties value risk differently, gives a little bit of room for positive sum transactions. But, given limited supply (of company shares) and large transaction volume in equity markets, this effect should be muted. That is, shortly after an IPO, I could see there being truly positive sum transactions as more risk-seeking investors enter the market. But, eventually, risk-aversion between buyer and seller should reach equilibrium and all future transactions will be largely zero-sum.
refurb 5y ago
Incorrect. Your definition of “winner” is someone who leaves money on the table (unknown to anyone at the time, based on a future value). By that definition there is no market where they are two winners. But clearly the economy grows and two parties in a transaction can walk away with more than the invested. “Winner” is someone who made money. You can easily have two “winners” by that definition.
- fairity 5y ago
  > Your definition of “winner” is someone who leaves money on the table No, my definition of winner (in a transaction) is someone who gives less than what they receive. > By that definition there is no market where they are two winners. No, transactions can be positive sum if the goods & services being traded are valued differently by the buyer and seller. For example, if it costs me $2 for materials & $8 in labor to knit sweaters, I value each sweater at $10. Someone else who is using the sweater to stay warm, may value that sweater at $30. If we transact at $20, that's a positive sum transaction. However, equity markets are different because the "product" that's being traded (NPV of future company cash flows) isn't valued differently by various parties. That is, if the NPV of future company cash flows is $100, there's no party that will pay more than $100 for it. This invariance in valuation is the feature that gives rise to the zero sum nature of equity markets.
  - JohnPrine 5y ago
    This disregards the time value of money. If I'm 80 years old, $100,000 today will have more value to me right now than $1 million paid out over 30 years.
  - refurb 5y ago
    But future NPV isn’t known. Yes, everyone would value future earnings of say $1B the same, but they don’t all agree the future earnings are $1B, thus they value it differently.
wilkommen 5y ago
> Fundamentally, owning shares in a company just grants you rights to a fraction of all future company earnings. No it doesn't! Owning shares in a company doesn't give you rights to a fraction of all the future earnings of the company. What kinds of shares have you been buying? All owning shares in a company gives you is the ability to sell those shares to someone else. There's some kind of nominal "voting rights" and in relatively rare cases there might be some amount of dividends you can get from owning the shares, but the value of the shares is very rarely derived from the voting rights conferred on the owner or the expected dividends to be received.
- setr 5y ago
  This I've never understood -- if a stock is detached from company earnings, then what drives the value of a stock, beyond the meaningless "someone else is willing to pay for it" -- why are they willing? It's not at all clear to me why my apple stock should have greater value, if apple does better as a company (or is predicted to do better).
  - JohnPrine 5y ago
    Stocks represent ownership in a company. Apple has $200 billion in cash currently. Owning a share of Apple quite literally means that you own a share of that $200 billion. It's useful to think about this in terms of a company's tangible assets because it provides a lower bound on the price of a share (assuming the company has no debt). If the Apple share price ever dropped so low that the sum of all the shares was worth less than $200 billion, a savvy investor could just snap up all the shares and effectively purchase 200 billion dollars at a discount. Any premium on the price of a share beyond the company's assets comes from either the dividends that you expect to be paid out as a result of owning that stock, or from an expectation that the company's assets will grow in the future (so that share will entitle you to part ownership of $300 billion instead of $200 billion, for example).
    - setr 5y ago
      The part I don't understand is how do I translate "ownership in apple" to USD. Obviously I can trade it to someone else, but that's just moving the problem -- eventually someone has to be in the position to actually extract real value out of the stock, in a fashion that correlates to company success. AFAIK dividends aren't an inherit property to a stock (it's a "class" of stock) so that's not fully satisfactory, and it's not guaranteed either (a board "chooses" to give out dividend, for reasons/amounts unclear to me). It's also very unclear how I would take my part ownership of $300B, and translate it to $20 in my pocket, except by passing the buck to some other investor. The only scenario I can think of is the risk of sufficient ownership to take over the company, at which point you could pay yourself wage or force buybacks, but then stocks are entirely worthless until someone holds less than 51% -- and even then, zuckerberg famously screws that equation too. So under this description, there's still no way to actually translate my FB stock into USD, without FB doing a buyback (which would be pointless, because there's no risk of control-loss anyways), until zuckerberg dies.

msdrigg 5y ago

I think the breakdown in this argument is the fact that $Y is not the same for everyone. > $Y is the net present value of all future earnings. First of all, ‘future earnings’ is a time-dependent probability distribution and this means that the outcome is not certain at the time of transaction. For example, we can imagine that a particular stock has a 50% chance of tripling in value after 10 years and a 50% chance of going bankrupt. What is the current value of this stock $Y. Even in this contrived case it seems like different people could value this stock differently today even knowing the probability exactly. Some investors need a reliable fixed income from their investments but don’t care much about growth (for example some retirees). They might not like this risk. Other investors want to increase their capital and are willing to risk volatility and losses. There are some cases where there is a clear zero sum game (pump and dump schemes for example), but I don’t think this is true for most transactions.

fairity 5y ago
Yea, I guess the fact that parties value risk differently, gives a little bit of room for positive sum transactions. But, given limited supply (of company shares) and large transaction volume in equity markets, this effect should be muted. That is, shortly after an IPO, I could see there being truly positive sum transactions as more risk-seeking investors enter the market. But, eventually, risk-aversion between buyer and seller should reach equilibrium and all future transactions will be largely zero-sum.

refurb 5y ago

Incorrect. Your definition of “winner” is someone who leaves money on the table (unknown to anyone at the time, based on a future value). By that definition there is no market where they are two winners. But clearly the economy grows and two parties in a transaction can walk away with more than the invested. “Winner” is someone who made money. You can easily have two “winners” by that definition.

fairity 5y ago
> Your definition of “winner” is someone who leaves money on the table No, my definition of winner (in a transaction) is someone who gives less than what they receive. > By that definition there is no market where they are two winners. No, transactions can be positive sum if the goods & services being traded are valued differently by the buyer and seller. For example, if it costs me $2 for materials & $8 in labor to knit sweaters, I value each sweater at $10. Someone else who is using the sweater to stay warm, may value that sweater at $30. If we transact at $20, that's a positive sum transaction. However, equity markets are different because the "product" that's being traded (NPV of future company cash flows) isn't valued differently by various parties. That is, if the NPV of future company cash flows is $100, there's no party that will pay more than $100 for it. This invariance in valuation is the feature that gives rise to the zero sum nature of equity markets.
- JohnPrine 5y ago
  This disregards the time value of money. If I'm 80 years old, $100,000 today will have more value to me right now than $1 million paid out over 30 years.
- refurb 5y ago
  But future NPV isn’t known. Yes, everyone would value future earnings of say $1B the same, but they don’t all agree the future earnings are $1B, thus they value it differently.

wilkommen 5y ago

> Fundamentally, owning shares in a company just grants you rights to a fraction of all future company earnings. No it doesn't! Owning shares in a company doesn't give you rights to a fraction of all the future earnings of the company. What kinds of shares have you been buying? All owning shares in a company gives you is the ability to sell those shares to someone else. There's some kind of nominal "voting rights" and in relatively rare cases there might be some amount of dividends you can get from owning the shares, but the value of the shares is very rarely derived from the voting rights conferred on the owner or the expected dividends to be received.

setr 5y ago
This I've never understood -- if a stock is detached from company earnings, then what drives the value of a stock, beyond the meaningless "someone else is willing to pay for it" -- why are they willing? It's not at all clear to me why my apple stock should have greater value, if apple does better as a company (or is predicted to do better).
- JohnPrine 5y ago
  Stocks represent ownership in a company. Apple has $200 billion in cash currently. Owning a share of Apple quite literally means that you own a share of that $200 billion. It's useful to think about this in terms of a company's tangible assets because it provides a lower bound on the price of a share (assuming the company has no debt). If the Apple share price ever dropped so low that the sum of all the shares was worth less than $200 billion, a savvy investor could just snap up all the shares and effectively purchase 200 billion dollars at a discount. Any premium on the price of a share beyond the company's assets comes from either the dividends that you expect to be paid out as a result of owning that stock, or from an expectation that the company's assets will grow in the future (so that share will entitle you to part ownership of $300 billion instead of $200 billion, for example).
  - setr 5y ago
    The part I don't understand is how do I translate "ownership in apple" to USD. Obviously I can trade it to someone else, but that's just moving the problem -- eventually someone has to be in the position to actually extract real value out of the stock, in a fashion that correlates to company success. AFAIK dividends aren't an inherit property to a stock (it's a "class" of stock) so that's not fully satisfactory, and it's not guaranteed either (a board "chooses" to give out dividend, for reasons/amounts unclear to me). It's also very unclear how I would take my part ownership of $300B, and translate it to $20 in my pocket, except by passing the buck to some other investor. The only scenario I can think of is the risk of sufficient ownership to take over the company, at which point you could pay yourself wage or force buybacks, but then stocks are entirely worthless until someone holds less than 51% -- and even then, zuckerberg famously screws that equation too. So under this description, there's still no way to actually translate my FB stock into USD, without FB doing a buyback (which would be pointless, because there's no risk of control-loss anyways), until zuckerberg dies.