The stock market is theoretically zero-sum but functions as non zero-sum. Wealth is created from the perception of value. For example, if the world suddenly sees my dog's toe nail clippings as worth $1000/ounce, where does that money come from? Perception of value. Maybe they cure cancer or something. If someone buys an ounce from me, $1000 goes in my pocket and comes from him. He has now accepted the risk that his perception is correct. Risk = perception. Now, say it turns out that the scientists were wrong and my dog's toe nail clippings don't cure cancer. The buyer is now out $1000. The wealth transference came from his perception of value vs. mine. It is zero sum. However, if it turns out the clippings also cure Alzheimer's disease, suddenly they're worth $2000/ounce. Where does this money come from? Perception of value. The constant in here and the reason for wealth creation assumes that people will always be around and always need a cure for cancer and some cheaper cure doesn't come along. This is why the stock market effectively functions as non-zero sum. Those are fairly major structural changes to the system and is the reason people would accept the risk of owning those clippings at $2000. This is a single instance, but imagine the DOW going to $0. Theoretically possible and would make the game zero sum, but highly unlikely. Most people are willing to risk their money on the perception that the world isn't going to collapse tomorrow and that people will continue to create new products and find new markets. In the futures market when one loses, another wins, because for every long there is a short. In the stock market there is not a short for every long. If the market goes up, the buyers have taken on risk from the sellers. The buyers didn't physically add the money that created the wealth, it is created when he accepts the risk that his perception is correct. It's possible that his perception is wrong and he will have to repay the wealth he created. The stock market is just a mechanism for the transference of risk. ie. perception. Barring a financial collapse, or a meteor wiping out the human race, the game is effectively not zero-sum. To say it another way. If I were to buy a share of MSFT at $200, I've accepted the risk that the company is worth that. I've created wealth and don't have to pay for that wealth creation unless I'm wrong. As long as I can find others that agree with that perception and willing to accept the risk, wealth is created.
Neal and Jem: I am flattered that you expect more of me, high expectations are a compliment of sorts. I can only hope that when I stumble and fall you continue to prefer mercy over schadenfreude. I will bring it up again since my energy analogy was left unaddressed, and I think it highlights how stockmarket ZSG interpretation is somewhat a frame of reference question: Is ENERGY a zero sum game? Yes or No? Science says yes, yet the promise of technology seems to say no in a practical sense. How are these two observations reconciled? Do non-guaranteed future inputs count towards the equation? Or do they forever remain in the realm of the potential, since present inputs are the only ones we ever make use of, and thus present in vs out, which matches up, being all that matters? I also think establishing a text book definition of ZSG is beside the point, or at least beside a deeper point that I wanted to make. (To paraphrase Chili Palmer, I'll be here as long as I want, and I'll make whatever point I want.) The point that I think is dangerous, regardless of whether it is agreed upon, is that in asking whether the stock market is zero sum, another question is actually hidden underneath: the question of whether something can be gotten for nothing. The question may be posed as a scientific one, sure, and the undercurrent of desire for easy gain may be vehemently denied. But I suspect that some who want to know the answer to this question, on a deeper level want to know whether they can make money trading without having to compete with others, whether their insecurities in regards to going up against veterans can be put to rest because there is enough to go round for all and "everyone can win." If this forced pollyanna mindset does not belong to many of you or even most of you reading this, fine. But the ZSG question has been posed enough times and in enough ways to make me wonder aloud and it's why I posted on the thread. It is to those who see ZSG as a therapeutic observation, and there are many I reckon, that I address this concern.
Simple Equation FGL=futures gains on longs FGS=futures gains on shorts TFG=total futures gains Also keep in mind that FGL=FGS*(-1) SGL=stock gains on longs SGS=stock gains on shorts TSG=total stock gains Also keep in mind that SGL<>SGS FGL+FGS=TFG=0 Therefore futures are ZERO SUM SGL+SGS=TSG=X Therefore stocks are NOT ZERO SUM X does not equal 0 To be a ZERO SUM GAME the equation must equal 0 at all times. Whereas in reality, even if the stock market stops trading or even drops to zero the equation will not equal 0.
There is more to life than P/L related in money terms. When you are making real money, every utterance and thought is not about making money. As you get older 2Good, you will see what I mean.
Senior Member Registered: Jan 2002 Posts: 118 09-10-02 09:11 PM aphie & Others quote: -------------------------------------------------------------------------------- Originally posted by aphexcoil It is my job to take the painting as it progresses and determine the style of the current day's painting. Is it a Rembrant, Picasso -- perhaps a Monet? I must then adapt to the market and "be with the market" and place myself in a position to move with the market with absense of fear, hesitation and concern of failure. -------------------------------------------------------------------------------- take the painting as it progresses and determine the style of the current day's painting?????????? I must say I find it amazing the trading wisdom I see in the above quote came from a 25 year old with basically no trading experience. In my opinion, aphie has been asking some very mature, insightful, interesting questions recently. Certainly a refreshing change from the arguments about God, Jesus & 97% proof of the second coming that have taken place in the TRADING FORUM lately. Questions like color shading for volume in candlesticks? His questions concerning a perfect moving average etc. and the discussion they have generated I have found interesting and thought provoking. These are the same type of probing, searching questions Larry Williams was asking in 1982 when I was first introduced to him (No I'm not implying he was asking me anything. Hell, at that time I barely knew up from down, but I have a friend who has sold some of his ideas to Larry.) Personally I don't think Larry is the sharpest tack in the box. In fact he says he is just an old DOS guy that used Genesis and others to convert his stuff to windows. But I do believe Larry is a master at sorting the wheat from the chaff, determining what is important and what is not, and being able to ask the right questions. I see a bit of this raw talent in some of aphie's questions and approach. _______________________________________________ Aphie I made the above post Sept. 10. It is unfortunate if you thought my earlier post today concerning Why Johnny Can't Trade or solving the simple ZERO SUM equation was directed at you or specifically at anyone else on this board. I can assure you it was not. Anyone who has followed my posts on this board knows I do not do that. Darkhorse I will say again that I do expect a lot more from your posts (even if it is a compliment) than I do from most on this board. You are (IMO) one of the most thought provoking intelligent posters I read. But I must stop before you get a big head. I would also like to say that I try not to offend others with my posts. But then again once in a while SHIT JUST HAPPENS!!
To me the zero sum question is academic. You should not be in the market if you do not know how to make money in it. And buy and hold is a sales pitch not an edge. So do not worry about me darkhorse the minute I lose my edge I will look for another one. In fact I am looking for one now so I will swing from vine to vine.
Nutsneal, I appreciate the kind words but why would you post what you posted about Johny not being able to trade simply because he's disagreeing with you about stocks being a Zero-Sum game? Let's not take it personal! I'll just say that we can agree to disagree here because we view this as being different. A lot of people are really making interesting analogies (apple with seeds gives you something for nothing, etc). Again, even an apple is zero-sum. Whether you plant the seeds and spend time managing an apple plant or go to the supermarket to purchase apples because you are paying someone else to do that world for you, it is all simply a transfer of commodity.
Pabst, now that is funny. Somebody please close this thread before 2Good has a heart attack. Surely there is some lawyer out there just waiting for a negligence case whereby an internet board operator allowed so much garbage to be posted that a new participant became so enraged and offended that he suffered a myocardial infarction. "You know, we would be willing to settle this case with ET for a free T-shirt, 30 days free commish from IB, and a free copy of "You Win with People" written by Don Bright." No offense Don, just poking fun a little.
heh, i would say the opposite is true: in theory, the creation of value through labor makes the stock market a positive sum game in the long run. however, for us short-term traders, the market is close enough to ZSG in practice. you're forgetting dividends. if you want an analogy from physics, you really should use ENTROPY, not energy, as it can be better associated with value. you see, one can view value as the reverse of entropy: whenever the entropy of an item/system is decreased (through labor), it gains in value. and vice versa: the decay of an item/system causes an increase in entropy and decrease in value. not sure where that analogy would take you though, because entropy - as opposed to energy - of a closed system is NOT constant, but increases over time. that's because every time a valuable item is created, the surrounding environment get's f*cked up by larger amount. (edit after reread: that's not an environmentalist whining, just a law of thermodynamics.) - jaan