Tuesday, November 11, 2008

S2 Muses the Stock Debacle : A Zero Sum Game has no winners...

A lot has been made about the recent Dow Jones crash in the last 30-45 days. I as like millions of others has observed and come with  their own theories of this debacle (wasteful spending on wars, poor credit market, sub prime mortgage mess. But instead of thinking and justifying the events in retrospective, I  thought and  tried to analyze the crystal ball from a different perspective. It stuck me!  Stock market is a zero sum game.  By making that statement, I am challenging the premise that does stock market really create value? Because behind every transaction (profit or loss) there are two parties that offset each other ( one who sells more than the intrinsic value of the stock wins and the one who buys it is a looser).  So technically there is no real value being created but a steady amount of movement of cash in different hands  and hence giving a perception of wealth creation. The reason this is difficult to recognize this basic phenomenon, is the macro representation of the economy that there is  potential growth involved and hence the potential upside movement of the stock. I am sure the converse is true in the bear market.  I think the sooner we realize that stock market was created as a a mechanism for ensuring easy and cheap credit and not a value/money creation manufacturing plant the better of we all will be. Yes there are economist pundits that will belly this whole theory and tell me that this is a typical myth of the common man but I thought i wanted to challenge the so called  day trader champions (you will make millions of dollar by following the technical analysis) who imply there is someone out there who is on the receiving end of this strategy. Also in the midst of all these transactions, the financial service companies eat their brokerage fees. Wow, on top of not creating value, we have just reduced the pie every time. In my mind the only thing that counters this zero sum equation  is that future holds more potential than the current or let me say future is not the same as present and hence the potential of change. What is the time horizon? Where is the present ending and future beginning is a debate in itself  but for now the next time you think you cracked the stock market movement and hence made a buck or two (thousands and millions for the big league) remember there is someone sitting on the other side of the world or coast loosing the same amount.

1 comment:

Shailesh Patel said...

Hmmm. I fear you are drifting from the light of capitalism to the dark side. So let me shed light and stop the plunge.

By zero sum game, you are equating investing in stocks to gambling -- which truly has no value creation. In gambling for every winner there is a loser.

Stocks on the other hand represent ownership in a company. Value is created as the company's value increases. Yes there are speculative runs on stocks that are not based on the underlying company value, but they are always corrected. In the end the value of the company is reflected in the value of the stock. By investing in the company you are providing much needed capital to increase productivity and create more value. In the end that is how wealth is created. If what you believe were true, we'd have the same number of millionaires today as we had say 100 years ago.

Regardless, don't be down on it. Think of all the poor that have risen to middle class and the middle class that have risen to affluency through market investing. The pie gets bigger.