Stock Market EV

hmkpoker · #1 10-11-2005, 10:07 AM

I suppose this fits as a "Math" type question above all, and I x-posted it to the stock market forum.

How is investing in the stock market +EV? I view the following as true (please correct me if I'm wrong):

1) The market is an almost-zero-sum game. Corporate earnings influence the values of stocks (which hurt or help everyone alike), but because most stocks have phenomenally high P/E ratios, the market is essentially zero sum.

2) Because it is zero-sum, you are competing against others in a game of odds. This includes people who have inside information, and therefore have a better edge of when to buy and sell. (I figure this would be like playing poker with people who are much better than you...and the broker's fees are like a rake!)

So how can stock trading be +EV?

sammysusar · #2 10-11-2005, 11:12 AM

I guess the proper answer is the market in the us and basically every other country have been +EV because of economic growth. Basically every developed country is getting more productive and efficient each yr so weatlth is created and this is reflected in the market. That is why the general trend of the mkt in the very long run should be up.
i dont think high pe's could make the market - EV in the long run(long run is like 50 - 100 yrs). However it could cause a very long period of stock mkt decline.
Economists also theorize that generally people dont see some of the catostrophic risks. i.e. a war that destroys the whole nation, etc. but generally since the other effects of this would be so bad is not really that relevant.
so basically the market is +ev

xxx · #3 10-11-2005, 08:59 PM

If you draw a figure on a balloon and inflate it, the figure gets bigger.

As long as the economy grows, it isn't a zero sum game. A rising tide raises all ships.

#4 10-11-2005, 09:56 PM

How can it be zero sum when it historically returns 12% per year?

Dan Mezick · #5 10-12-2005, 01:28 AM

The current price reflects the votes of all the players. Those with advance info do leave footprints. Often the chart will start percolating. And the options.

Weeks later we learn why.

TomCollins · #6 10-12-2005, 11:50 AM

Economy is not a zero sum game.

I have a gold mine, but no tools. You have tools. Current value ~0. We make an agreement to use your tools to get the gold out of my mine. We end up with more money than we started, and no one has less. How is this zero sum?