Trading & the Zero Sum Game Debate

xelite777 said:
The current average annual return from 1926, the year of the S&P’s inception, through 2011 is 11.69%. It's almost twice the percentage you gave! : http://www.daveramsey.com/article/the-12-reality/lifeandmoney_investing/
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Dave ramsey pimps 12% number in his shows.

Average is not a very useful number. Correct way to calculate is to calculate CAGR.

http://en.wikipedia.org/wiki/CAGR
http://www.moneychimp.com/features/market_cagr.htm

From 1926-2011 Average is 11.84%
CAGR is 9.8%, big difference
 
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scr12 said:
From 1926-2011 Average is 11.84%
CAGR is 9.8%, big difference
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Did you re-invest the dividends?

Anyway, 10%, 12%, 11%, who cares, bottom line the S&P 500 returns about 10% a year.

So no, the stock market is NOT a zero-sum game, end of story.
 
Ok, i admit i was wrong using S&P with BBG : BBG doesn't compound dividends on very long period, I didn't know that.

Anyway xelite777, arguing that trading is not negatively skewed shows that you are not a pro and/or novice because this is an evidence.
Pro traders usually are right 50% to 70%. And these are good ratios. If you read Market Wizards series from Jack Schwager, elite traders confirm these figures.
Moreover, they got 10 times more information and means than common people.
Commissions are lower than common people. Fewer slippage because orders are done by their own marketplace.
Even with all these advantages, majority lose money or are flat, that is why there are fewer and fewer prop traders in big firms.
So how can you imagine then that on average everyone can be positive with trading? Except of course facing 5 years of non-stop bull market before losing all during the next bear market? Explain, i am curious.
 
What you're describing is an edge. Professionals have edge over retail. This is true. But that doesn't explore whether or not trading is zero sum.

The only way to determine whether a stock trades in a zero sum manner is to sum the P&L of all market participants throughout the history of the stock trading since its inception. It can be said that the trade is not zero sum provided the company has released more cumulative dividends to shareholders than the total market capitalization of the stock.

But it gets more dicey than that with reinvestment of dividends. You see investors needs to double their money from dividends (more for inflation adjustment) to laugh all the way to the bank scott free from their investment. But more so they need to withdraw that gain away from the market (either to savings or invest somewhere else) to mark a win with the investment. The problem with reinvesting dividends with the same stock, is that it can continue to zero sum possibility, if tomorrow the stock plunges to zero all of a sudden (yes theoretically only). In that case, if every investor who's ever collected a dividend, reinvests back into the stock to drive up share price and market cap, and the stock plunges to zero, it doesn't matter significant amounts of dividends have been paid out equal to double the initial investment for each individual investor, because the trade is still zero sum when stock plunges straight to zero since they are holding a bunch of paper who's value is mark to market and all their gains are again marked to the share price by reinvesting.
 
butterfacetrader said:
What you're describing is an edge. Professionals have edge over retail. This is true. But that doesn't explore whether or not trading is zero sum.

The only way to determine whether a stock trades in a zero sum manner is to sum the P&L of all market participants throughout the history of the stock trading since its inception. It can be said that the trade is not zero sum provided the company has released more cumulative dividends to shareholders than the total market capitalization of the stock.

But it gets more dicey than that with reinvestment of dividends. You see investors needs to double their money from dividends (more for inflation adjustment) to laugh all the way to the bank scott free from their investment. But more so they need to withdraw that gain away from the market (either to savings or invest somewhere else) to mark a win with the investment. The problem with reinvesting dividends with the same stock, is that it can continue to zero sum possibility, if tomorrow the stock plunges to zero all of a sudden (yes theoretically only). In that case, if every investor who's ever collected a dividend, reinvests back into the stock to drive up share price and market cap, and the stock plunges to zero, it doesn't matter significant amounts of dividends have been paid out equal to double the initial investment for each individual investor, because the trade is still zero sum when stock plunges straight to zero since they are holding a bunch of paper who's value is mark to market and all their gains are again marked to the share price by reinvesting.
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Butterfacetrader, i agree with you. But the problem is that it is impossible to verify by calculations P&L of all investors. And trading involves reactions that don't fit with rational behavior. That is why game is biased.
If we make an analogy with poker game, sure there is more money today than 10 years before thanks to Internet, growing public interest, etc. But it is still a negatively skewed game. There are of course more winners, and professional players win more (as on-line poker firms) because the cake is bigger, but winners are still a small proportion, like 10 years before. IMHO I think this is the same with trading.
 
butterfacetrader said:
The only way to determine whether a stock trades in a zero sum manner is to sum the P&L of all market participants throughout the history of the stock trading since its inception. It can be said that the trade is not zero sum provided the company has released more cumulative dividends to shareholders than the total market capitalization of the stock.
More...

Even tho' it is a tall order to see this data, it can be calculated for individual mutual funds. M* calculates "dollar weighted return" which measures "average investor return" over certain number of years.

http://performance.morningstar.com/...returns_page&t=VFINX&region=usa&culture=en-US

Here is the data for VFINX (S&P500 mutual fund). Over the past 15 years investors have realized less than 50% of SP500 total return (2.12% vs 4.37%). Most of these can be explained by "behavior finance". Investors sell at the bottom and buy at the top, that is why "momentum factor" is alive and well.
 
Zero-sum games (like the Futures or the Forex market) return 0% over the years, meaning that collectively traders do not make money, they just shuffle their money around. Not a single additional dollar is ever created, just like in a poker game.

Please note that I am not saying that it is impossible to be profitable trading the Forex or the Futures, all I am saying is that these games do not produce wealth for all market participants.

On the other hand, collectively, traders make money in the stock market. Sure, there are winners and losers, but as a group they make money, for the simple reason that the equity market never stops its never-ending up move. Add also the dividends and it's easy to see why the equity market is not a zero-sum game.
 
Chris Mac said:
Butterfacetrader, i agree with you. But the problem is that it is impossible to verify by calculations P&L of all investors. And trading involves reactions that don't fit with rational behavior. That is why game is biased.
If we make an analogy with poker game, sure there is more money today than 10 years before thanks to Internet, growing public interest, etc. But it is still a negatively skewed game. There are of course more winners, and professional players win more (as on-line poker firms) because the cake is bigger, but winners are still a small proportion, like 10 years before. IMHO I think this is the same with trading.
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Well, yeah you can't. Its an impossible task to do if the stock is trading. Yous imply can't sum all P&L from the lifetime of the investment, if the lifetime is unbounded on one end and has not ended yet. So if thats the case we look at dividend payout. If a compnay paid out more dividends cumulatively than its market cap, then this stock is not zero sum anymore since existing shareholders have made more off it than their market cap, collectively.

Theres actually higher money supply because of quantitative easing. So on that basis, based on price alone, you would expect stock prices to also inflate simply because of that.

scr12 said:
Even tho' it is a tall order to see this data, it can be calculated for individual mutual funds. M* calculates "dollar weighted return" which measures "average investor return" over certain number of years.

http://performance.morningstar.com/...returns_page&t=VFINX&region=usa&culture=en-US

Here is the data for VFINX (S&P500 mutual fund). Over the past 15 years investors have realized less than 50% of SP500 total return (2.12% vs 4.37%). Most of these can be explained by "behavior finance". Investors sell at the bottom and buy at the top, that is why "momentum factor" is alive and well.
More...
Total cumulative dividend vs market cap can be easy to find out. For sum of P&L, that is often impossible for stocks that are still trading.
 
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