Books Referenced in the Podcast
- Stocks for the Long Run by Jeremy Siegel:
- Buy on Amazon
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Buying Stocks is NOT a Zero-Sum Game (Investing First Principle) – Show Outline
The full show notes for this episode are available at https://www.diyinvesting.org/Episode31
Mental Model: Zero-Sum Games
- Any gains by one participant must be offset with losses by other participants.
- The sum total of all value for all participants is equal to zero
Why buying Stocks is NOT a Zero-Sum Game
- Stocks as a whole don’t provide a positive expected value
- You don’t have to “take” from others in order to receive. When companies create value this is “new value.” The economy grows, everyone becomes wealthier.
Stock Picking vs Index Funds?
- The thought is that half of the money must underperform an index, and half of the money can outperform an index. The thought, therefore, is that buying stocks is zero-sum.
- Where is the fallacy?
- Index’s have historically had a positive expected value. If an index returns 10%, even if half of the money receives 8%, and half receives 12%, both parties are successful in growing their wealth.
- One party doesn’t lose 10% so that the index can grow 10%. That’s not how this works.
- Instead, stock ownership is best described as a positive sum game.
What is a Positive-Sum Game?
- A positive sum game is where the total value received of all participants is greater than zero.
- This means that you can be successful without worrying about the success of others.
- Frees you from the need for comparison, jealousy, or envy.
- Just because someone else made money, doesn’t mean you lose money.
- Takeaway: You can ignore index funds and focus on your own personal goals
- Takeaway: You can ignore macroeconomic trends. As long as your fundamental analysis of a company is correct, the broader economic picture is irrelevant.
Why is this true? – Capitalism grows the economic pie
- Companies are full of employees who go to work each and every day trying to find a way to make your profits grow.
- While this sometimes involves taking market share from other companies, the greatest gains come from innovation, improved efficiencies, new markets, and new products.
- This raises the standard of living for all and the overall economic pie for the economy.