Investing — in anything stocks, bitcoins, goat futures, whatever — is a zero-sum game, according to most critics and proponents of investing.
Someone buys, someone sells. Someone wins, someone loses.
In a very broad sense, this is true, but if we look a little more closely we can see that the zero-sum game does not exactly fit investing because of the timescale involved. In fact, investing is rarely a zero-sum game.
We like our models. No, not super models. Humans use models to improve the efficiency of thinking. Guesswork, it turns out, is what being intelligent is all about. That’s why when we one of our investments sours, we immediately equate that to a game, like baseball or football. We struck out. We lost. But baseball and football — or whatever game you’re into — have finite time limits: innings, quarters, periods, etc. But many investments do not.
Take a stock trade. You may buy stock in a company and the price begins to go down. You sell your stock and someone buys it. According to the zero-sum model, you lost: you bought high and sold low. And the other guy bought it lower, so he won.
However, you have yet to hit the ninth inning. What if you take that investment and buy another stock and it soars? What if the winner in this trade — the investor who bought your stock — finds that the company continues to underperform and its value continues to crater? These trades — that seemed to be a winner-loser type of thing — can be seen as only one play in a much longer, much more complex game that we call the “market.” The buying and selling of an investment are usually seen as “the game.” As we can see in the above scenario, they are not. They are just plays within the game.
Only finite limits define a zero-sum game and, as long as people are in the market and companies are being created and sustained — then, the zero-sum game heuristic does not fit. In fact, it can be debilitating. People who fail at certain investment strategies immediately exit the game.
In other words, investing isn’t so much a zero-sum game as investors are zero-sum thinkers.
Obviously, there are much better examples of the zero-sum model in investing. Off the top of my head, I see that options — which can expire at a certain time and be essentially valueless — is a type of zero-sum game. If you don’t exit in time, or the underlying security doesn’t perform to your expectation, then your investment goes to zero. You lose. (However, I would point out that option trading has become a thing-in-itself and not what the strategy is most ideally intended — as a hedge to non-zero-sum game trading. You should use options to guard against risk on your main options.)
There are probably other types of investing that are better understood in the zero-sum model.
The point I would like to pass on is to be careful of our models. They become self-fulfilling prophecies — and not just for us. They can spread and infect other people’s thinking. They can lead to the most horrible type of model-making called “policy changes.” A policy change is when a government entity decided to make bad heuristics into the law of the land and there is only one true law in this case — the law of unintended consequences.
What do you think? Do you think zero-sum investing is still a good model? Do you know of other investment models, or perspectives, that have similar faults?