Is the Stock Market a Zero-Sum Game?
It’s all about perspective.
More often than not, stock markets are viewed through the prism of- A’s gain leads to B’s loss. However, it is not that simple after all. It is intuitive for us to accept what the world tells us, without actually understanding the nuance attached to it. Let us try and do that this time around.
You see, broadly there are two sorts of market participants- Traders (or Speculators) and Investors. While you could remark that the end goal for both parties is to make money, their journey to the destination makes all the difference. If you are wondering what exactly is the difference between the two, allow me to share an insightful excerpt-
While investing you tell yourself that Rome wasn’t built in a day, whereas while trading you remind yourself that Hiroshima and Nagasaki were destroyed in a day.
That pretty much sums it up. Speculators, as the name suggests, play the game of a quick buck. They do not care about the PE ratio or the sales figure for the last 4 quarters. All that they are concerned about is that if they buy a stock in the morning, will its price increase by lunchtime? On the other hand, investors play the game of compounding, wherein they carefully assess the prospects of a name and then bet their money on it.
Now, let’s get to the core of the topic. In simple words, the zero-sum concept is like a tennis match. Federer wins and Nadal loses, unlike the stock markets. We will dissect this idea from the perspective of a trader and an investor, independently. Starting with the former. Let’s assume there are only two traders in the system. At the end of the trading session, Y’s gross profit was ₹1,00,000 whereas Z’s gross loss was the same. That is not the end of the story, hold on. There are charges/taxes that get accrued to the system, during their transaction. Continuing with the same example, let us say these charges amounted to ₹5,000 on each end. Therefore, Y’s net profit will be ₹95,000, and Z’s net loss will be ₹1,05,000. Hence, it is negative-sum.
What about investing? Investing is far away from the concept of zero-sum. It is a mechanism through which all the stakeholders (read investors) accumulate wealth, over a considerable course of time. As much as one hates to admit this, investing is a function of time and not skill. Investing is characterized by the distribution of wealth- if P, Q, R, S, T had invested equal amounts in Nifty50 (at 7610) on March 23, 2020, and liquidated their position on March 23, 2021 (at 14814), all the five of them would have generated a return to the proximity of 95%. It’ll not be that S will earn more than Q. This is wealth creation.
To conclude, please bear in mind that viewing trading with a negative bias would be the most intuitive thing to do right now. ‘It’s negative-sum and I could well be sitting at Z’s position after a day’s trade.’ But, you need to pause. The problem with us when dealing with financial matters is that we conveniently ignore the context in which things demand us to look at them. And the context is the individual’s goalpost. My goal in the stock markets is and will surely be different than yours because we lead two different lives. Period. Ergo, your modus operandi and mine shall and should never match. In simple words, it is imperative to have a clear understanding of your goals and then play the game accordingly. Clarity cleanses perspective.
