Similarities between Poker and Investing

[DVO]

"There are no blinds, antes or rake in financial markets, but there is opportunity costs. If your investments are not moving much, you are losing profit you could make in some other investment."

1) Poker has rake costs plus opportunity costs (Investing has only opportunity costs ( assuming you do it yourself)

2) Good point, if you assume the additional players are disproportionately 'fish'..a reasonable assumption.

[BarkingMad]

The reality of the situation is at odds with the quote you posted. ‘Risk adjusted’ has nothing to do with it.

The crucial point is that in stocks there is not an equal number of sellers taking the opposite side of each stock buyers position. A company issues shares, and investors buy them. The only way to profit if the stock goes down is to “sell short” by borrowing shares from an institution and then selling those shares to a buyer, but short sellers are not crucial to the existence of the market. In many cases, there are only buyers.

Look at a chart of stock that is at an all time high, and ask yourself, where are the losers? There are none. The investors are winning, and the company that has issued the shares is winning.

This win-win scenario is impossible with zero sum games.

In zero-sum games the amount of winnable money is fixed. Whatever is gained by one player, is lost by the other player; the sum of gains and losses is zero.

In stocks, the sum of gains and losses does not have to equal zero (and rarely does). Therefore, the stock market is not a zero sum game

-Lance

[BadBoyBenny]

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There are no blinds, antes or rake in financial markets, but there is opportunity costs. If your investments are not moving much, you are losing profit you could make in some other investment.


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There are trading fees, or management fees for mutual funds. These fees, what I consider to be a cost of liquidity are very similar to the rakes in a casino as I consdier them the cost a creating the games and drawing in diverse groups of people.

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GDP has an equivilant in poker--the poker market has been expanding for many years.

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This analogy makes some sense, but the financial markets are the equivalent of a few world-wide poker games. My home game does not grow because more people watch poker on TV. The field size of local tourneys do though, so I see your analogy as being partially correct. More so if you live by and play at a casino.

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Swings in investing can be brutal depending on what you invest and the the time period you hold them.


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Very true, and this is a good reason why it is better to have a financial advisor who is good a risk management than one who recommends hot stocks or guarantees rates of return.

[sofere]

The stock market is absolutely zero sum, even if the total market cap grows. This is due to the economic concept of opportunity cost. When you buy a stock it is obvious what your are gaining and what you are giving up. However, when you sell a stock you are not only selling the stock at its current level, but you are selling all of the future gains/losses and dividends from that moment on.

For example, Person A buys XYZ stock at $10 and sells it for $15. That person has obviously gained $5/share. Now lets say person B buys that stock from person A and the stock goes up to $100/share. Not only has person B gained $85/share on XYZ, but person A lost $85/share due to opportunity cost. Person B is exactly $85 dollars richer and person A is exactly $85 poorer than if the transaction had never taken place. This concept of opportunity cost means that almost by definition, investing must be a zero sum game even if the gains and losses are difficult to perceive.

[sofere]

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tek,

In order to contest your position that the stock market is a zero-sum game on an absolute basis, I'm going to extend your example and thereby offer an alternative result.

If you purchased X at 10, sold it at 14, and X then dropped to 12, you will have gained 4 and the purchaser will have lost 2. Your gain is greater than his loss and produces a net positive outcome.

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Yes but you bought the stock from someone at 10...that person also lost $2/share due to missed opportunity. Loss of 2+2 = 4 plus your 4 gain = zerosum.

[tek]

[ QUOTE ]
[ QUOTE ]
There are no blinds, antes or rake in financial markets, but there is opportunity costs. If your investments are not moving much, you are losing profit you could make in some other investment.


[/ QUOTE ]

There are trading fees, or management fees for mutual funds. These fees, what I consider to be a cost of liquidity are very similar to the rakes in a casino as I consdier them the cost a creating the games and drawing in diverse groups of people.

[/ QUOTE ]

Ok, management fees could be considered a rake if they are charged no matter what the investment rresults are.

As far as brokerage fees, they are not charged unless a trade is made, so I don't consider them to be blinds or antes...

I'm even amazing myself at what a nit I'm being [img]/images/graemlins/smile.gif[/img]

[BarkingMad]

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The stock market is absolutely zero sum...

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The above statement is incorrect. Any number of tangential arguments can be made to support the quote above, and they will all be wrong.

This is fundamental stuff, critical to understanding our economy, how capitalism works, and being a sucessful investor/trader. This "zero sum" misconception has far reaching social and political implications that I'm not going to make a career of writing about here.

Consider this though. When a company develops new products that improve people's lives, employs new workers, issues stock, and generates tax revenue that previously did not exist, something has been created.

When a company or an individual gains wealth, they did not necessarily do it at someone elses expense. Wealth can be created.

The stock market can create (and destroy) wealth. Zero sum games transfer wealth, they cannot create it. The stock market is <font color="red"> not </font> a zero sum game.


Link

[Paluka]

[ QUOTE ]
The stock market is absolutely zero sum, even if the total market cap grows. This is due to the economic concept of opportunity cost. When you buy a stock it is obvious what your are gaining and what you are giving up. However, when you sell a stock you are not only selling the stock at its current level, but you are selling all of the future gains/losses and dividends from that moment on.

For example, Person A buys XYZ stock at $10 and sells it for $15. That person has obviously gained $5/share. Now lets say person B buys that stock from person A and the stock goes up to $100/share. Not only has person B gained $85/share on XYZ, but person A lost $85/share due to opportunity cost. Person B is exactly $85 dollars richer and person A is exactly $85 poorer than if the transaction had never taken place. This concept of opportunity cost means that almost by definition, investing must be a zero sum game even if the gains and losses are difficult to perceive.

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This entire post is rubbish.