The economy is not a zero-sum game and that's something I wish more people understood. Real GDP per capita grows. The average US citizen has access to more intrinsic values that aristocrats had just a few centuries ago.
However, he may be talking about pure trading, a.k.a speculation, which is very close to a zero-sum game. If you are not in for the dividends, yes, that's close to a casino where the banks who charge for transactions are the inevitable winners.
I wish we followed Warren Buffet's advice and forbid to sell a stock less than 6 month after buying it. I also don't see any interest in making the stock prices change every nano second. A quote a day can be enough if you are an investor, not a speculator.
> I also don't see any interest in making the stock prices change every nano second. A quote a day can be enough if you are an investor, not a speculator.
Well, there isn't any interest in it per se, but that is intrinsic to how fast we can make trades... Somebody offers the lowest sell price and somebody offers the highest buy price. The "value" constantly changes as those two highs and lows fluctuate based on who decides they'll sell for lower than the lowest offer or who decides they will buy for higher than the highest bid.
Unless you're saying that those offers/bids should only be accepted once/day and can't be changed until the next day? That's the only way I could forsee changing the quote once/day.
Even if you only update the order book once a day, you still need some way to decide which of 2 orders at the same price gets in front of the other, so people still have to compete on time, except now the prices are worse in both directions because market makers have to be able to commit to the price for the entire next day.
My proposal is to randomize the order at which orders arrive. Market makers are largely algorithms by now anyway.
Send orders all day, clear them once a day. Calculate the resulting quote.
Let go of the illusion that the real value of companies change every nano second. The fact that stock exchanges close at night and that for 12 hours, values don't change proves that it is not a necessity.
Having 12 hours instead than a few seconds to think about the impact of a given news on the stock market is going to give room to breath for actual investors.
Increasing inequality is a problem I consider very important for the progress of mankind, but I just want to point out that in this discussion on this specific topic, the share of GDP is not what is important. The absolute number (in PPP) is what we want to look at.
The Gini coefficient will give you a measure for the statistical spread of GDP per capita and is used to measure inequality. [1] Taking the time series of the Gini coefficient and the GDP will show the growth for a percentile of interest.
I guess I'm searching for a graph that has time on the x-axis and (real gdp * % of income that went to the bottom z%) on the y-axis for 5 ~ 10 different values of z. And hopefully it trends upwards for all values. I'm just surprised this isn't something that economists have already thought of as it feels like it would be the most important GDP-derived metric. Or at least "GDP per capita on median" if that makes sense.
There is a zero-sum game in the some sense if you focus on potential buyers. If you buy out all the onions in a grocery store (and continue to do so once they restock), eventually the grocery store is going to start raising onion prices. Thus anyone purchasing onions after you will suffer a slightly higher price. In theory, the long term price of a stock should be the sum of its discounted future cash flows. If you bid up a stock through purchases, anyone who wanted to purchase the stock after you (assuming your decision to purchase did not affect their decision) will suffer a slightly higher purchase price, most likely leading to reduced future gains. Liquidity is gained for any sellers.
This is not really true. The market overall works as a surprisingly efficient resource allocation engine. Onions aren't a great example as they are a commodity rather than a stock.
Regardless, if someone does bid up the price of onions, it will typically trigger increased production of onions as farmers can make more profit by growing onions vs. another vegetable. This increased supply will pull the price back down.
The same happens in the stock market, increased demand (roaring stock market) eventually produces new equity (IPOs). But it doesn't necessarily mean that the new equity is of identical quality (ex: 2000 boom IPOs like Pets.com, or Uber - though we still don't know if Uber is a good stock or not; check back in 5-10 years).
And in the credit market - after all the good debtors are served, and there's still demand for new credit - bad debtors start being served. This keeps on going till it bursts (like in the housing bubble).
Perhaps my argument can be simplified as follows. If everyone had the same models, they would pick the investment with the highest ROI adjusted for risk (ignoring externalities). That same investment is now not available for someone else: they now have to take the second best.
Thanks for the explanation, your argument makes sense.
I'd just look at it in a slightly different, perhaps more optimistic way. The fact that this investment has the highest ROI means that society as a whole would benefit from injecting additional capital into that investment.
In that sense, you're right that other investors have a less desirable price. However in theory at least, everyone is better off since that investment now has more capital, and is able to produce more output, positively contributing to the overall economy and increasing the size of the overall pie.
If the stock market appreciates 7% per year on average, then it appreciates by 0.02% per day and you're effectively making $0.20 per $1000 per day with massive volatility. $0.20 is so miniscule, it's not even large enough for a restaurant tip. It's not that uncommon to see large swings in either direction; The market went -4.85% just this week. The stock market is not a zero sum game over the long term (10+ years), but on a day-to-day basis, the market is effectively a zero sum game. If you manage to make more than the market's return, it's because some poor guy or gall out there made less than the market's return.
Fun fact: over 60% of the trade volume on the stock markets comes from bots. If you have enough of a superiority illusion to think your daytrading game these days can outplay the MIT PH.D Quant traders that wrote HFT bots for hedge funds, then you're in for a surprise.
I don't have the exact Peter Lynch quote but he said something to the effect that any period of less than two years in the stock market and you're basically entering a casino. Any period of greater than 2 years and you're investing.
Some other investor said that you should give a company enough time to use and generate a return from the money it received from selling it's stock before you fundamentally expect to see the returns.
No, it is not true. It is not true for options either. The zero-sum trading game fallacy is a common misperception.
For any kind of asset, the ability to transfer it has value. When someone needs to buy a new car, they often sell their old car to a dealer at a price that is lower than what they could get if they sold it to another individual. They do it because it is more convenient and/or they can't wait around for the right buyer to come along. A dealer has a better idea of the car's value and is willing to put it into inventory until someone buys it at a higher price. He takes a risk he might have to wait longer than expected to sell it again (which incurs more inventory cost), but he trades a lot of cars, so on average, his relative risk is lower than yours would be. He essentially charges you a fair price for this service. Even though technically you might say you lost on the deal, both sides are winners if the price was reasonable.
In a similar way, a stock trade can be a win-win situation. One trader may be willing to do the transaction at a discount because they have a better way to use the money or because they need to reduce their risk. Another trader may know more about the stock and/or have a different risk profile, so he is willing to take the risk of holding the asset until a profitable transaction is possible. This provides a win-win for both sides if the charge for the service is reasonable.
Of course, there are traders who are detrimental to a market and provide no value, just as there are crooked car dealers. That doesn't invalidate the value of good trading just as it doesn't invalidate the value of good car dealing.
E.g. you could give someone insurance on their stock position if you can take the risk. This allows them to participate in the game so you both benefit.
Another is that you might be able to lend more cheaply than the other can loan but they want to leverage up their portfolio. With options you can effectively make a cheaper loan to them to purchase a specific product. They lend more cheaply, you make part of the spread.
It’s not true in absolute terms: for example during a bubble or an upward trend everyone wins. However, if you only consider excess returns (return - some average return), or look at certain derivatives then there are situations where some winning positions require equivalent losing positions.
This is definitely not true. In a zero-sum game, every bit of profit one person makes comes from the pocket of the counterparty. A stock option is a zero-sum proposition: at the expiration of the option, one party ends up “in the money”, the other party is “out of the money” by the same amount.
Stocks are not a zero-sum game. They have sustained value, so when I sell you a share of stock, you get the share, and I get money equal to the value of the stock.
One might argue that day trading is roughly a zero-sum game, if we make the simplifying but inaccurate assumption that the values of stocks don’t change across a trading session, and assuming that everyone goes home each night with all positions closed out.
According to Rober Shiller's long term data on the American stock market - from 1871 to 2019 the stock market advanced by 2.323% yearly on average without dividends, and 6.836% yearly on average with dividends reinvested. Both figures after inflation. That amounts to total gains of 2'900% and 1'780'000%, respectively.
However, he may be talking about pure trading, a.k.a speculation, which is very close to a zero-sum game. If you are not in for the dividends, yes, that's close to a casino where the banks who charge for transactions are the inevitable winners.
I wish we followed Warren Buffet's advice and forbid to sell a stock less than 6 month after buying it. I also don't see any interest in making the stock prices change every nano second. A quote a day can be enough if you are an investor, not a speculator.