re zero sum: The key element that confuses people imho is the fact that the game never stops. The stock market is like a game of musical chairs that goes on forever, where the number of chairs is determined by the money supply. Or you can think of the stockmarket as a pie. At any given point there is a finite amount of dollars in the game. This amount is always fluctuating as money goes in and out, but the point is that there is always a defined pie. So we have a living pie that expands and contracts like a beating heart. In a futures contract, the winners and losers are defined and traceable and the game has a time limit (the expiration of the contract in question). Stocks are no different EXCEPT that the expiration date is some point way off in the future when the markets stop for whatever reason. Same game, just no time limit. If I short MSO and take money from Martha Stewart, that money is lost to her for good. If the stock goes back up, she gets money back but NOT THE SAME MONEY (unless I am buying MSO for some nutty reason). If you are a buy and holder and lose your money to trader Peter, you may eventually get it back from new long term investor Paul. But it's not the same money. It looks the same to you, because a dollar is a dollar- money is a fungible commodity like wheat or lumber. But in reality there are finite winners and losers every day. The losers still in are simply banking on the odds of becoming winners at a later date. Pretty much all long term investment strategies depend on the benign effects of inflation and a constant influx of assets as workers put their savings in stocks. This is why money supply is so much more important than people think. If the market is gorged with cash, the broad market will go higher for the same reason a laundry bag will expand if you put enough socks in it. It works in reverse too. When the pie shrinks, there is less pie to eat all around, and the weak players at all levels of the game get squeezed. Just as turkeys can fly in a tornado, stocks of great companies can go down simply because there is not enough money to keep the broad market up. This, coincidentally, is why Greenspan is such an idiotic jerk. He is the main culprit of the bubble because he drowned wall street in a sea of excess liquidity and then acted naive when everyone went nuts. So it's a zero sum game and the brokers/middlemen play the game also, they get hurt in contraction just like traders do. Money coming in versus money coming out determines the size of the pie, and everyone directly tied to the market lives and dies based on the here and now size of that pie and how effectively they can compete for a piece.
Here's an answer to the zero sum game question that I think any finance professor will agree with. Equity markets are not zero sum games. Equities are assets with the potential to increase the wealth of all stakeholders. A rising tide lifts all boats. Futures trading is a zero sum game. Futures contracts are not assets, they are contractual obligations betweeen two parties. As such, for every dollar gained a dollar is lost. Same for exchange-traded otpions.
This is exactly correct. Equities markets are not zero sum games. What makes anyone who argues that they are believe that for every long position there is a short? It just isn't so!!!! The equity markets can and do provide wealth and they also delete it. Think of the definition of "equity"....simplify it into a private business. If the business is successful, it MAKES MONEY. If not, IT LOSES MONEY. When it loses money, who benefits? Anyone short the guy with a hot dog stand?
another confusing element: the markets are finite and all losers can be matched with winners-if you include brokers and middlemen as winners, the ledger adds up perfectly. BUT the money supply is NOT finite, it is infinitely malleable. the fed can inject or remove liquidity with a few simple keystrokes by changing fractional reserve requirements. They can create or destroy billions of dollars worth of lending power simply by adjusting a number or a decimal point. So, you have a finite/zero sum game in which perhaps the biggest influence is an ephemeral/ fluctuating/ irrationally subjective money supply that can be monkeyed with at will. It's like spiking the oxygen tank with laughing gas, makes for all kinds of goofy problems.
Let's not confuse money with wealth, however. Wealth has actual value. Money can be created with a central banker's keystroke. True wealth, i.e. true NEW buying power, is ONLY created through applied productivity. The world's wealth is expanded through genuine increases in productivity or efficiency. All the other stuff is the illusion of paper assets being stolen or tweaked or shifted around. This is why government policies aimed at tweaking or massaging the economy always end in tears. A lot of government policy and subsequent market activity is just high class white collar stealing. It IS zero sum because the ledger always adds up. Uncle Sam's funny money just makes it impossible to get a bead on where the ledger really is.
also Guerilla I agree that stocks can rise for sustained periods with all longs rejoicing hand in hand, however that rise still completely depends on new money coming in and enlarging the pie. so it's still a fluctuating but finite pie because you need new flow to see your assets grow. consider the bagholders who graciously allowed the dotcom venture capitalists to cash out on their dime.
Not true. You don't need new flow. Here's a much simplified example. Bill Gates never took MSFT public. He own's 100% of the share. Earnings increase year after year. Balance sheet stockholders equity increase year after year. Stock price (value) increases year after year.
Nope. If Bill Gates never took Microsoft public, then there wouldn't be a listed value for the company. And he certainly wouldn't be worth xxx billion, because much of that valuation is due to market sentiment and mutual fund baloney. If he tried to cash out, Bill would have to find someone to buy the company from him. And what would the prospective buyer of a privately held Microsoft do? He would take a hard look at the balance sheets and try to assess the REAL value of Microsoft, based on the wealth that Bill Gates has ACTUALLY created through his innovation, products and customer base. In other words, he would try to pay Bill what the value of the company's productivity was and not a penny more. At the end of the day, the only real value is contained in the productivity element of what a company does or makes. This is why so many dotcoms went to zero. Rational money does not support hype, it only supports tangible goods and services (OR the reasonable expectation of such in future). Fluctuating money supply is the head scratcher. When the money supply contracts and the bank recalls your $50,000 loan that forces you to sell stock, that money can go back into thin air if the bank does not loan it back out due to higher reserve requirements. When a bank loans out money it doesn't have and then doesn't reloan that money, poof that money is gone, back in the reverse keystroke. It's still a zero sum game. Just spiked with emotion, uncertainty and government moonshine. p.s. the increase in earnings you cite would only come with an increase in sales, an increase in actual use of Microsoft's products. Bill Gates has increased the productivity of basically every desktop computer user in the world. thus he is worth a lot of money. Wealth is a direct result of actual useful work. Money supply is a result of smart aleck politicians. Unfortunately, real gains and bogus gains are tangled up
Zero Sum is defined (in Websters and Funk & Wagnalls) as the amount of money you have left after day trading. So to answer the thread question......I am a Zero Sum Trader. I much prefer everyones answer to this question than the history of quote or something in that regard. Doctors have a greater than thou attitude because they went to school for long and feel they have life and death in their hands. I know my proctologist has my life in his hands. Doc, a million in one shot...........