Investing- Done before but worth repeating

[Bear669]

The stock market is NOT a zero sum game (unlike commodity or futures markets)

Having said that, of course there are many losers, due to many factors, among the major issues:

It is very hard to find a broker/manager who is a) honest b) ethical c) competent.
Most people are too a) emotional b)ignorant c) lazy to invest for themselves.

I had my biggest paper losses last year, when Oil & Gas prices dived.

 

[Gyaos]

I had my biggest paper losses last year, when Oil & Gas prices dived.

Why did you stay in? Why didn't you sell at $130.00 before it went to $147.11? Anyone knew that was a totally bogus price. I'll give you another hint for later on. Many airlines hedged their fuel into 2010 at levels HIGHER than what oil is now ($78.00 current price), so expect the recovery to begin when those overpaid hedging contracts end.

If everyone made a million only in their own city, everyone would be rich.

Gyaos Baltar

 

[Bear669]

I am not a trader

Why did you stay in? Why didn't you sell at $130.00 before it went to $147.11? Anyone knew that was a totally bogus price. I'll give you another hint for later on. Many airlines hedged their fuel into 2010 at levels HIGHER than what oil is now ($78.00 current price), so expect the recovery to begin when those overpaid hedging contracts end.

If everyone made a million only in their own city, everyone would be rich.

Gyaos Baltar

(Though I did take some out at the top for personal reasons)

I have the best investment manager in the world (30+ years now) and one of the keys for investing is a 5 YEAR time horizon. Over the last 5 years, I still made a lot, and I expect the same from 2007-2012. (not necessarily in energy- whatever he picks)

 

[Rockslinger]

As long as the GDP grows, equities and real estate values will grow with it. My friend said his parents bought their house in High Park in the 1950's for $5,000 (yes, $5,000) and it is currently worth north of $500,000.

 

[Malibook]

The market is a zero sum game.
Every dollar that is made came from someone else.
The market does not create money into existence out of thin air like the Federal Reserve and the market does not vaporise money into oblivion.

Money is not lost at the moment the market goes down.
Your money is gone the moment you buy the stock.
What goes down with the market is the current valuation of the asset.

If somebody trades a share at double the current stock price, it's not like everybody just doubled their money.
Nobody else has made anything unless there is new cash to buy investors' shares for more than they paid.

 

[C Dick]

I don't see how you can say that the market is zero sum. It is zero sum on the trading side, in that when I buy for $10, someone else sold for $10. But dividends represent real cash that is being generated in companies (or scams, but that is not most of it). The value of a stock is roughly based on the NPV of the future cash flows from dividends, so it is the dividends that are showing the value that is being created.

 

[Bear669]

Like the man sez

I don't see how you can say that the market is zero sum. It is zero sum on the trading side, in that when I buy for $10, someone else sold for $10. But dividends represent real cash that is being generated in companies (or scams, but that is not most of it). The value of a stock is roughly based on the NPV of the future cash flows from dividends, so it is the dividends that are showing the value that is being created.

And of course Malibrook is totally wrong.

Just to simplify a bit for others-

Suppose your grandma bought IBM in 1920, sold in 1950 and of course made a profit. The BUYER in 1950 sold in 1980-and made a profit. The 2nd buyer in 1980 sold in 2000- and made a profit. the 3rd buyer in 2000 sold in July 2007, and made a profit. (Dont hold me to the dates- this is an example)

The day trader bought UTS yesterday at 10am, sold at 10:10 , made a profit, the 2nd buyer sold at 10:15 and made a profit, the 3rd buyer sold at 10:25 and made a profit, the 4th buyer lost money for the rest of day, then held on to 2012 and made a fortune.

Having said all that, some games are less than zero sum (due to brokerage fees and the casino's take). And comments on the USUAL function of a stock market are not necessarily relevant to those selling NAKED shorts (anyone care to comment?)

 

[Big Rig]

The market creates wealth because their stocks are intrinsically worth more because they are producing wealth which the consumer buys

If you never sold you can still make money with the dividends

The market is not a zero sum game

It is possible that everyone could win or that everyone could lose

 

[fuji]

The market is a zero sum game.

As others have pointed out to you, you are wrong, due to stock dividends and stock buybacks that can be funded from corporate profits. Corporate profits are not zero sum, wealth can be created by corporations, therefore the market is not zero sum, as it is partly funded by that wealth creation.

The bond market is similarly not zero sum, as the interest on the bonds may represent wealth creation.

Stock options, futures, credit swaps, and other derivatives, on the other hand, are zero sum, as their value is formally disconnected from the wealth creation mechanisms.

 

[Malibook]

Suppose your grandma bought IBM in 1920, sold in 1950 and of course made a profit. The BUYER in 1950 sold in 1980-and made a profit. The 2nd buyer in 1980 sold in 2000- and made a profit. the 3rd buyer in 2000 sold in July 2007, and made a profit. (Dont hold me to the dates- this is an example)

The day trader bought UTS yesterday at 10am, sold at 10:10 , made a profit, the 2nd buyer sold at 10:15 and made a profit, the 3rd buyer sold at 10:25 and made a profit, the 4th buyer lost money for the rest of day, then held on to 2012 and made a fortune.

That is the description of an endless pyramid.
The only way people get paid out is with an ever increasing supply of new cash.
Plus you are talking in nominal terms and not adjusting for inflation.
The market does not magically increase the money supply.
It is simply a bunch of assets that change hands at varying prices that do not always go up forever like an endless pyramid.

True, my description did not allow for dividends which is a legitimate point.
Unfortunately the vast majority of stocks don't pay dividends and have no hope in hell of ever paying dividends.

Stock buybacks are not a transfer of wealth to shareholders.
Most often they are a transfer of wealth to insiders because they cash in options and the company buys stock to keep the float from exploding.

 

[Malibook]

It is possible that everyone could win or that everyone could lose

Your money is gone the moment you buy the stock, not when the stock goes to zero.
The seller has your cash the moment the trade settles.
The current value of the stock may go to zero and thus remove any chance of you recovering your money but your cash was long gone before that.

 

[moresex4me]

That is the description of an endless pyramid.
The only way people get paid out is with an ever increasing supply of new cash.
Plus you are talking in nominal terms and not adjusting for inflation.
The market does not magically increase the money supply.
It is simply a bunch of assets that change hands at varying prices that do not always go up forever like an endless pyramid.

True, my description did not allow for dividends which is a legitimate point.
Unfortunately the vast majority of stocks don't pay dividends and have no hope in hell of ever paying dividends.

No the market does not magically increase the money supply. But as GDP grows, and Real GDP grows, real wealth grows, and more money gets added to the money supply as individuals and companies have more assets they can leverage, they borrow more, which means chartered banks borrow more from the B of C, which means a bigger money supply.

GDP growth is driven to a large extent by companies on that are traded on the market. They do create wealth, over and above inflation. So it is not a zero-sum game, sorry, you are dead wrong.

As to your last point, even the ones that don't pay dividends may end up growing their business, increasing their assets, etc. so that they become bigger and are worth more. Their shares would then also be worth more.

 

[Malibook]

GDP growth is driven to a large extent by companies on that are traded on the market. They do create wealth, over and above inflation. So it is not a zero-sum game, sorry, you are dead wrong.

Of course some successful companies do grow and become more valuable just like many go bankrupt.

My point was simply that every dollar of capital gain that someone cashes out of the market had to come from someone else.
Your paper gains are not realized unless there is new money coming in to buy your shares.

I do stand corrected though.
The market is not a zero sum game.

 

[Writer]

No the market does not magically increase the money supply. But as GDP grows, and Real GDP grows, real wealth grows, and more money gets added to the money supply as individuals and companies have more assets they can leverage, they borrow more, which means chartered banks borrow more from the B of C, which means a bigger money supply.
.

So what does increase the money supply? As we all well know there is much more money today than there was years ago. At one point in time there was no such thing as a trillion dollars. This year the U.S. government printed billions of dollars - which increased the money supply, but they didn't always do that. What's your explanation?

 

[Bear669]

Another good summary

No the market does not magically increase the money supply. But as GDP grows, and Real GDP grows, real wealth grows, and more money gets added to the money supply as individuals and companies have more assets they can leverage, they borrow more, which means chartered banks borrow more from the B of C, which means a bigger money supply.

GDP growth is driven to a large extent by companies on that are traded on the market. They do create wealth, over and above inflation. So it is not a zero-sum game, sorry, you are dead wrong.

As to your last point, even the ones that don't pay dividends may end up growing their business, increasing their assets, etc. so that they become bigger and are worth more. Their shares would then also be worth more.

Phew, thank heavens Malibook finally gets it.

 

[fuji]

The only way people get paid out is with an ever increasing supply of new cash.

So what? So long as there is an ever *increasing* supply of goods and services.

You don't need to contemplate money here. Look at it in pure terms of raw natural resources. A company takes a certain amount of labour, and a certain amount of land, and a certain amount of material, and uses all of that create something new that never existed before and which has real value. It is now worth, in raw material terms, more than it was.

This is true whether or not your economy includes "money".

Money simply makes trades more liquid. In an economy with money, such as all modern economies, if you did not increase the money supply you would face *deflation*. That is because businesses would create ever more value, and so you would have the same number of dollars chasing after a larger number of goods and services.

As a result the money supply should increase in line with the creation of new goods and services, so that the proportion of dollars to goods remains roughly constant, or at most increases by a predictable amount (a flat, predictable rate of inflation).

The market does not magically increase the money supply.

Actually, it does.

It is simply a bunch of assets that change hands at varying prices that do not always go up forever like an endless pyramid.

No, actually new assets are created over time. That is what businesses do: They create goods and services (aka, assets).

Stock buybacks are not a transfer of wealth to shareholders.

Stock buybacks are mathematically equivalent to dividends. The only different is one of expectation--you expect a stock buyback to be a one time event, whereas you expect a dividend to be a regularly recurring event. There are also tax differences.

 

[Malibook]

Stock buybacks are mathematically equivalent to dividends. The only different is one of expectation--you expect a stock buyback to be a one time event, whereas you expect a dividend to be a regularly recurring event. There are also tax differences.

Cisco buys back stock on a fairly regular basis.
The reason they buy back stock is to offset the dilution of shares from employee stock options.
The stock will often have a pop upon such announcements but these are often not material in the grand scheme of things.
Short term volatility is often much more dramatic than any such pop.
Cisco does not pay dividends and these short term pops are not equivalent to dividends except perhaps to some traders.

There are many successful companies whose stock may never see a new high again or won't for a very long time in real terms.
By the time CSCO ever sees $80 again, if ever, $80 will be worth much less than it was.

People who think these pyramids can go on forever need only look at the car industry which is a core industry in society.

The notion that eventually investors will all come out well off from being in the market is wishful thinking but likely not reality.

 

[Yoga Face]

As others have pointed out to you, you are wrong, due to stock dividends and stock buybacks that can be funded from corporate profits. Corporate profits are not zero sum, wealth can be created by corporations, therefore the market is not zero sum, as it is partly funded by that wealth creation.

The bond market is similarly not zero sum, as the interest on the bonds may represent wealth creation.

Stock options, futures, credit swaps, and other derivatives, on the other hand, are zero sum, as their value is formally disconnected from the wealth creation mechanisms.

Then what is the point of derivatives?


How do they do what the market is supposed to do - put money in the hands of corporations for investment in expansion and thereby drive economics

Derivatives just fuck things up and cause recessions so they should be outlawed or do they create a capitol fluidity that is essential ?

 

[moresex4me]

Money simply makes trades more liquid. In an economy with money, such as all modern economies, if you did not increase the money supply you would face *deflation*. That is because businesses would create ever more value, and so you would have the same number of dollars chasing after a larger number of goods and services.

I think you meant it would cause inflation, not deflation. That is one of the causes of inflation.

Again, wealth increases as real GDP grows, more money becomes available as people borrow from the Bank of Canada (which basically prints more, although most of the transactions are electronic only, so there isn't even paper money corresponding to them) using this newly created wealth as collateral. The Bank controls the supply by making it more or less expensive to borrow (prime lending rate).

They watch inflation as the primary measure, ensuring it does not grow too much. It is an indicator of the level of wealth being created. The more wealth, the higher inflation goes. The lower interest rates go, the more people borrow, the greater the money supply, inflation comes down.

That's it simplistically. It's economics 101. Buy a text book.

 

[Malibook]

Actually, it does.

No, actually new assets are created over time. That is what businesses do: They create goods and services (aka, assets).

So when the market tanked last year the money supply tanked too?
Even if every share traded every day, this would not be true.

Of course assets are created but an economy needs sound money to pay for them.
Why doesn't the government just give everybody unlimited platinum cards so that everybody can accumulate more assets and enjoy more services and stimulate business for everybody?