You’ve might not have heard of this before. The stock markets are a zero sum game, no matter how much you’d like to deny this fact. Here’s the definition of a zero-sum game from Wikipedia.
In economic theory (this mainly applies to stocks), a zero-sum game is a mathematical representation of a situation in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.
In other words, for every winner, there’s a lose. For every dollar made from speculating with stocks, someone else lost a dollar. It’s simple. But simply realizing that the stock markets are a zero sum game is useless. We need to take a look at the implications.
All stocks will eventually go to zero, given enough time.
Nothing stands forever, as the saying goes. No company (stock) will last forever. The big names of today, whether it be Wal-Mart, Google, Home Depot. All will one day be nothing but a memory in history books. Don’t believe me? Let’s take a look at the Dow Jones Industrial Average. The Dow Jones average was founded on May 26, 1896. Back then, there were only 12 stocks in the index (not 30 like there are now). Here’s what happened to them.
American Cotton Oil – no longer around
American Sugar - no longer around
American Tobacco - no longer around
Chicago Gas - no longer around
Distilling & Cattle Feeding - no longer around
General Electric – still around
Laclede Gas - no longer around
National Lead - no longer around
North American - no longer around
Tennessee Coal & Iron - no longer around
U.S. Leather - no longer around
U.S. Rubber - no longer around
Many of these were once the titans of their day, the leaders (or monopolies, which was often the case) in their market. Only 1 remains.
So one day, all stocks will go to zero. I had someone on the internet calling me an “idiot” for saying that there needs to be a sell strategy if you’re using buy and hold. He said that the whole point of buy and hold was not to sell, but instead to hold “forever”. So let’s do what this “genius” recommends. Let’s buy stocks and hold forever. Guess what? One day, every single stock in that portfolio will go to zilch. Zero.
I’m just pointing out the flaws of buy and hold here.
Don’t be fooled by the indexes.
You may be thinking “you’re wrong, Tony. Just take a look at the indexes like the Dow. They steadily increase overtime. They don’t go to zero.”
Let me tell you something. The indexes frequently kick out underperforming companies, and add new well performing companies to itself. In essence, the indexes are just making themselves better and better by selecting the best.
Investing isn’t a game that everyone will win at.
If investing is a zero sum game, there will be losers. I hate to break it to you, but there will always be investors who end up not making a cent over the course if his entire life. I just hope it’s not you, my reader. That is why, you need to educate yourself! Most people think that investing is like gambling. The love the rush of andreline when they press the buy button.
Investing isn’t a game where you can just take a glance at the financial summary of a company and invest in a profitable company. It takes skill, and persistent monitoring of the markets. That being said, if you’re not willing to be devoted to the markets (at least know what you’re doing), then it’s in your best financial interest to get out of the game. Stop investing on your own, and just put all your money in one of those 6% a year Fidelity funds.
Alternatively, if you don’t know what you’re doing, then learn as much as you can.