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#12
07-19-2005, 05:51 PM
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Re: Buy and Hold vs Market Timing
Poker is basically a zero sum game.. for you to win $$$ at the table, someone else at the table must lose $$$.
In the stock market, the market cap of a stock changes (ie the size of the pie changes), for example... You own 1,000 shares of stock XYZ that has 10 million shares outstanding, and is trading at $10, and therefore a market cap of $100 million. The stock goes up $1, you have made $1,000, collectively all the owners of the stock have made $10 million, and the stock now has a market cap of $110 million. Yes some people may have held the stock short and thus lost $$, but it is not equal to the number that held it long, therefore its not a zero sum game. 
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#14
07-22-2005, 03:12 PM
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Re: Buy and Hold vs Market Timing
last time i checked the stock market is a zero sum game
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#15
07-22-2005, 03:52 PM
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Re: Buy and Hold vs Market Timing
A Zero Sum Game is a situation where one participants gain results from another persons loss. The net change in total wealth among participants is zero.
Options and Futures contracts are a zero sum game, as is gambling. The stock market however, is not a zero sum game, because wealth can be created in the stock market (thru increased market cap).
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#16
07-22-2005, 09:00 PM
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Re: Buy and Hold vs Market Timing
money doens't come out of nowhere, you can't just *make* money appear in your bank without someone else losing it.
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#17
07-22-2005, 09:47 PM
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Re: Buy and Hold vs Market Timing
[ QUOTE ]
money doens't come out of nowhere, you can't just *make* money appear in your bank without someone else losing it. [/ QUOTE ] You really don't understand the market. Take the following example: I buy a stock at 20 and sell it to you at 30, the next day it goes to 35. No one lost money, I made 10/share, you made 5/share, everyone is happy. It doesn't always happen that way, but businesses are designed to make money, so in general stocks usually go up more than down.
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#18
07-22-2005, 11:37 PM
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Re: Buy and Hold vs Market Timing
[ QUOTE ]
I buy a stock at 20 and sell it to you at 30, the next day it goes to 35. No one lost money, I made 10/share, you made 5/share, everyone is happy. [/ QUOTE ] why did the stock go up? because there were more buyers than sellers. not everyone who sold at 30 had bought it at 20 like you. but those buyers at 30 had to get the shares from somewhere.. maybe shorts, maybe people who bought at 40 and cutting their loss, etc. either way, somethings not right. the explaination of market cap doesnt clear it up. maybe its something to do with the company producing more revenue and paying it back as dividends.
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#19
07-23-2005, 01:03 PM
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Re: Buy and Hold vs Market Timing
[ QUOTE ]
money doens't come out of nowhere, you can't just *make* money appear in your bank without someone else losing it. [/ QUOTE ] In poker, this is true... Sum of all players winnings = Sum of all players losses + Poker Site Rake. No money created, just money shifting around. In the stock market, when a stock's perceived value increases, money is indeed created out of nowhere. Think of this very simplified example... A new stock has an IPO, 3 people buy 1 share of the stock @ $10, a 4th person comes in and buys each of their shares (1 @ 11, 1 @ 12, 1 @ 13), the stock is now worth 13. Person A - Bought at 10, Sold at 11 = +1 (cash) Person B = Bought at 10, Sold at 12 = +2 (cash) Person C = Bought at 10, Sold at 13 = +3 (cash) Person D = Bought 1 @ 11, 1 @ 12, 1 @ 13, holding @ 13 = +3 (on paper) Everyone made $$$.
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#20
07-23-2005, 01:47 PM
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Re: Buy and Hold vs Market Timing
[ QUOTE ]
why did the stock go up? because there were more buyers than sellers. not everyone who sold at 30 had bought it at 20 like you. but those buyers at 30 had to get the shares from somewhere.. maybe shorts, maybe people who bought at 40 and cutting their loss, etc. [/ QUOTE ] This is actually simple. As a thought experiment, if you start a company from nothing and it grows to have sales that generate earnings of say $1,000,000 year it has certainly increased in value. A companies valuation is a function of it's future earnings more or less. Asset values also play a role but quite often a lesser one. The function of the stock market is to establish a value for publicly traded companies. That value is based on future earnings discounted for the equivalent risk free rate and the risk premium that investors demand for undertaking the risk of owning stock in the company. The equity risk premium in the past has been such that it is substantially higher than risk free bond yields. This is known as the ex post risk premium. The future risk premium that compensates stock investors for buying stocks is a subject of much debate in financial circles. This future risk premium is called the ex ante risk premium. Now if a company grows their earnings at a certain rate the market more or less determines what the value of these earnings are. If a company actually generates more earnings than the market anticipates, the value of the stock increases all other things being equal. Therefore the long investor makes money "out of thin air" in two different ways. One is by being paid a risk premium over bonds that will be reflected in the earnings of the companies that comprise the market more or less. The stock holders are the "owners" more or less and ultimately earn the profits. The second way is that an individual companies can produce more earnings than the market anticipates. Now there are many things companies do with earnings (such as paring down debt, paying dividends, making acquisitions, R&D, expanding product lines, etc.) and so valuing those earnings is what the whole stock market is about really. Stock valuations are inherently volatile due to the "debate" if you will over what earnings are worth.
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