Similarly, investing is not a “zero-sum” game either.
Interesting point of view. I agree that Enron gains may not come at the expense of BP shareholders but where did they come from? It seems to me that every dollar made in the stock market must come at the expense of someone else unless dollars are magically created out of nothing somewhere in the process.
MikeAdamson - 05:04am on 04/17/2006
That "magic" is exactly the basis for all economies - the creation of wealth. We could all, in theory, produce everything we needed to sustain and enrich our own lives - food, clothing, shelter, and entertainment. It works better, though, for each of us to focus on one or a few particular things we’re good at, and trade those for something that other folks are good at. A single farmer, specializing, can produce food large numers of people, whereas that same number of people farming for themselves would produce much less. There remains waste, inefficiency, and fraud, but those tend to be minor factors in healthy economies.
The same applies to the stock market. A dollar flowing into the market is an investment; on average, that dollar grows because it is used to fuel economically productive activity. That’s the "magic" that creates dollars. Some companies fail, but on average the value of the stock market grows because of the wealth that its companies create.
We now know that Enron was an exception. It created no net wealth, but instead was an example of waste and fraud. Many people lost the money they put into Enron; but if they bet across the board on the economy they could be showing a net gain at this point.
Mike - 06:04am on 04/17/2006
MikeA: What Mike said. This is a fundamental difference between socialist econ and the free enterprise variety. If your premise were true, then every rich person got that way by taking something away from someone else. It’s a "fixed pie", right? If that were true, Karl Marx would be a genius. In fact, it hasn’t been true since the Industrial Revolution, when we invented manufacturing to replace handicrafts. We constantly create value, so that everyone can be wealthier the next moment, if they do what is necessary to do so.
robert108 - 07:04am on 04/17/2006
Mike and r108...thanks for your interesting points on the genius of free markets. I certainly agree that free market activity (the capitalist model) creates a bigger pie rather than merely splitting a static pie but I believe Bat1 is discussing investing and his examples highlight investing in the stock markets. The stock market is certainly not unrelated to the economy but it really is a different animal as I’m sure you will agree that it is an exchange mechanism i.e. I sell my shares to r108 and Mike sells his shares to me. All money within the system is brought into the system by an actor...no money is created through the exchange of shares. If I make $5 then there is an offsetting loss of $5 somewhere...not counting transaction costs of course.
N’est pas?
MikeAdamson - 08:04am on 04/17/2006
MikeA: You make some good points, but not all. I am bothered by one of your points, and have been for some time: The stock market, in and of itself, does not increase value. That doesn’t make it a zero-sum game, since the spinoff is increased investment, which ultimately creates prosperity. It doesn’t directly create prosperity, though. On one level, the stock market, as a whole, goes up when more stocks are sought than are offered for sale, conversely, when more stocks are offered for sale than are wanted at that moment, the market goes down. As such, it is the epitome of a free market. What you are doing when you are investing in the "stock market" in general is that you are investing in the continuing prosperity of the free enterprise system in the US. When you invest in any particular stock, you are investing in the financial health of that company. The Macrocosm is the aggregate of all the microcosms.
So, when I make $5 on a share of stock, no one has to lose $5 somewhere. More people wanted to buy the stock than wanted to sell it. The reason or reasons for that could be anything from sound business reasons to the phase of the moon. That is the gambling part.
robert108 - 08:04am on 04/17/2006
The stock market, in and of itself, does not increase value. That doesn’t make it a zero-sum game, since the spinoff is increased investment, which ultimately creates prosperity. It doesn’t directly create prosperity, though.
I’m not following you r108. I’m not sure what you mean by "value" in terms of the stock market (money?) and you haven’t explained how my gain of $5 does not come at the expense of another. Where did that $5 come from if not from another participant in the market?
MikeAdamson - 08:04am on 04/17/2006
First, I believe that in his original comment, MikeA mistakenly wrote Enron, rather than Exxon. That should make the rest of his comments somewhat easier to understand. Now, that is not to say that the case of Enron is not important. It most certainly is. But my original post referred back to earlier comments by a number of us about having made money on the rise of Exxon stock.
MikeA,
It might help to get beyond the notion that the economy creates money. It doesn’t. The economy, including the various markets (NYSE, NASDAQ, CBOE, etc.) creates wealth. And that is not the same thing as money. Money is how we measure wealth, or value, but it is nothing more than an artificial storehouse and a medium of exchange for value or wealth. As, for example, is a check, or the electronic impulses that zip back and forth when you use your debit card to buy lunch for yourself and your wife/girlfriend/secretary/main-squeeze.
Ultimately, any asset is worth not what you paid for it, but what someone else is willing to pay you for it. Shares of stock, T-bills, municipal bonds, a house, an office building, an ounce of gold, a bushel of soybeans, a hunderedwieght of porkbellies, or an "allotment" of 500,000 barrels of Iraqi oil, all are worth only what someone is willing to pay for them. And bringing the seller and the buyer together, that’s the function of a market.
Bat One - 09:04am on 04/17/2006
MikeA: Sorry about the unclarity. I shouldn’t have put the two statements together, thus implying that they were related. They aren’t. Bat has clarified the issue as being between wealth and money. If your stock goes up $5, it is not necessary for anyone else’s stock to go down $5; the entire value of the market can go up, due to the creation of value in the economy, which is the basic point. Things are ultimately worth only what someone else will pay for them.
My own take on Enron(not Exxon) is that no one knows the real price of energy, since it has always been a govt-subsidized monopoly. Therefore, the ultimate value of Enron stock was always unknown, so how could anyone reasonably trade in it? I never considered it a good investment, so it had no value for me. A lot of people did, though, and that is why it’s a free market. People are free to invest or not, as they wish, and they may profit or lose. Degree of risk=amount of return if you are right. In my mind, Enron was a sure loser.
robert108 - 09:04am on 04/17/2006
MikeA said, "All money within the system is brought into the system by an actor...no money is created through the exchange of shares.... I’m not sure what you mean by "value" in terms of the stock market (money?) and you haven’t explained how my gain of $5 does not come at the expense of another. Where did that $5 come from if not from another participant in the market?"
It appears, M.A., that you are conflating the ideas of "dollars" in the market with "value" in the market. Let’s take a hypothetical widget company whose business grows steadily and honestly from day one. I buy the IPO for $5/share. I later sell my stake for $10/share to you. You, in turn, sell the stock to a third party for $15/share.
Who’s won and who’s lost? It depends. If the company is doing well, its success creates the value represented by the share. If I bought a stock worth $5 by paying 4%, then I have lost nothing. If it’s worth $10.00 when I sell it to you, I have gained but you have not lost. If it’s worth $15 when you sell, you have gained but your buyer has not lost.
We only "gain" or "lose" if the underlying value of the stock decouples from what we have paid for it. Even though we bring our dollars into the market to purchase the stock, the underlying value is creating by the successes and failures of the company issuing the stock.
By contrast, if I sell you the stock for $10/share, and the company loses half its value due to crushing competition, you may have lost relative to your purchase price, but your loss has little to no relation to my gain (unless I have insider information - fraud).
Final scenario. I buy at $5/share. You buy, not from me, but direct from the company, a new issue, at $10/share. Third Party buys another re-issue from the company at $15/share. The company takes our collective $30 and invests it in more efficient widget production, improving its bottom line and increasing the value of the company. We all sell our stock for $20/share - the current actual value. We’ve all gained, but no one has lost.
In fact, true "investment" is always a non-zero-sum game, a win-win situation, because of that very effect. It’s speculation - betting that a stock is under- or over-valued based on market inefficiencies - which is a zero-sum game. Day trading is a great example of this.
Mike - 12:04pm on 04/17/2006
Great post, Mike. One small quibble from a few posts back: Money is also a store of value.
Similarly, investing is not a “zero-sum” game either.
Interesting point of view. I agree that Enron gains may not come at the expense of BP shareholders but where did they come from? It seems to me that every dollar made in the stock market must come at the expense of someone else unless dollars are magically created out of nothing somewhere in the process.
That "magic" is exactly the basis for all economies - the creation of wealth. We could all, in theory, produce everything we needed to sustain and enrich our own lives - food, clothing, shelter, and entertainment. It works better, though, for each of us to focus on one or a few particular things we’re good at, and trade those for something that other folks are good at. A single farmer, specializing, can produce food large numers of people, whereas that same number of people farming for themselves would produce much less. There remains waste, inefficiency, and fraud, but those tend to be minor factors in healthy economies.
The same applies to the stock market. A dollar flowing into the market is an investment; on average, that dollar grows because it is used to fuel economically productive activity. That’s the "magic" that creates dollars. Some companies fail, but on average the value of the stock market grows because of the wealth that its companies create.
We now know that Enron was an exception. It created no net wealth, but instead was an example of waste and fraud. Many people lost the money they put into Enron; but if they bet across the board on the economy they could be showing a net gain at this point.
MikeA: What Mike said. This is a fundamental difference between socialist econ and the free enterprise variety. If your premise were true, then every rich person got that way by taking something away from someone else. It’s a "fixed pie", right? If that were true, Karl Marx would be a genius. In fact, it hasn’t been true since the Industrial Revolution, when we invented manufacturing to replace handicrafts. We constantly create value, so that everyone can be wealthier the next moment, if they do what is necessary to do so.
Mike and r108...thanks for your interesting points on the genius of free markets.
I certainly agree that free market activity (the capitalist model) creates a bigger pie rather than merely splitting a static pie but I believe Bat1 is discussing investing and his examples highlight investing in the stock markets. The stock market is certainly not unrelated to the economy but it really is a different animal as I’m sure you will agree that it is an exchange mechanism i.e. I sell my shares to r108 and Mike sells his shares to me. All money within the system is brought into the system by an actor...no money is created through the exchange of shares. If I make $5 then there is an offsetting loss of $5 somewhere...not counting transaction costs of course.
N’est pas?
MikeA: You make some good points, but not all. I am bothered by one of your points, and have been for some time: The stock market, in and of itself, does not increase value. That doesn’t make it a zero-sum game, since the spinoff is increased investment, which ultimately creates prosperity. It doesn’t directly create prosperity, though. On one level, the stock market, as a whole, goes up when more stocks are sought than are offered for sale, conversely, when more stocks are offered for sale than are wanted at that moment, the market goes down. As such, it is the epitome of a free market. What you are doing when you are investing in the "stock market" in general is that you are investing in the continuing prosperity of the free enterprise system in the US. When you invest in any particular stock, you are investing in the financial health of that company. The Macrocosm is the aggregate of all the microcosms.
So, when I make $5 on a share of stock, no one has to lose $5 somewhere. More people wanted to buy the stock than wanted to sell it. The reason or reasons for that could be anything from sound business reasons to the phase of the moon. That is the gambling part.
The stock market, in and of itself, does not increase value. That doesn’t make it a zero-sum game, since the spinoff is increased investment, which ultimately creates prosperity. It doesn’t directly create prosperity, though.
I’m not following you r108. I’m not sure what you mean by "value" in terms of the stock market (money?) and you haven’t explained how my gain of $5 does not come at the expense of another. Where did that $5 come from if not from another participant in the market?
First, I believe that in his original comment, MikeA mistakenly wrote Enron, rather than Exxon. That should make the rest of his comments somewhat easier to understand. Now, that is not to say that the case of Enron is not important. It most certainly is. But my original post referred back to earlier comments by a number of us about having made money on the rise of Exxon stock.
MikeA,
It might help to get beyond the notion that the economy creates money. It doesn’t. The economy, including the various markets (NYSE, NASDAQ, CBOE, etc.) creates wealth. And that is not the same thing as money. Money is how we measure wealth, or value, but it is nothing more than an artificial storehouse and a medium of exchange for value or wealth. As, for example, is a check, or the electronic impulses that zip back and forth when you use your debit card to buy lunch for yourself and your wife/girlfriend/secretary/main-squeeze.
Ultimately, any asset is worth not what you paid for it, but what someone else is willing to pay you for it. Shares of stock, T-bills, municipal bonds, a house, an office building, an ounce of gold, a bushel of soybeans, a hunderedwieght of porkbellies, or an "allotment" of 500,000 barrels of Iraqi oil, all are worth only what someone is willing to pay for them. And bringing the seller and the buyer together, that’s the function of a market.
MikeA: Sorry about the unclarity. I shouldn’t have put the two statements together, thus implying that they were related. They aren’t. Bat has clarified the issue as being between wealth and money. If your stock goes up $5, it is not necessary for anyone else’s stock to go down $5; the entire value of the market can go up, due to the creation of value in the economy, which is the basic point. Things are ultimately worth only what someone else will pay for them.
My own take on Enron(not Exxon) is that no one knows the real price of energy, since it has always been a govt-subsidized monopoly. Therefore, the ultimate value of Enron stock was always unknown, so how could anyone reasonably trade in it? I never considered it a good investment, so it had no value for me. A lot of people did, though, and that is why it’s a free market. People are free to invest or not, as they wish, and they may profit or lose. Degree of risk=amount of return if you are right. In my mind, Enron was a sure loser.
MikeA said, "All money within the system is brought into the system by an actor...no money is created through the exchange of shares.... I’m not sure what you mean by "value" in terms of the stock market (money?) and you haven’t explained how my gain of $5 does not come at the expense of another. Where did that $5 come from if not from another participant in the market?"
It appears, M.A., that you are conflating the ideas of "dollars" in the market with "value" in the market. Let’s take a hypothetical widget company whose business grows steadily and honestly from day one. I buy the IPO for $5/share. I later sell my stake for $10/share to you. You, in turn, sell the stock to a third party for $15/share.
Who’s won and who’s lost? It depends. If the company is doing well, its success creates the value represented by the share. If I bought a stock worth $5 by paying 4%, then I have lost nothing. If it’s worth $10.00 when I sell it to you, I have gained but you have not lost. If it’s worth $15 when you sell, you have gained but your buyer has not lost.
We only "gain" or "lose" if the underlying value of the stock decouples from what we have paid for it. Even though we bring our dollars into the market to purchase the stock, the underlying value is creating by the successes and failures of the company issuing the stock.
By contrast, if I sell you the stock for $10/share, and the company loses half its value due to crushing competition, you may have lost relative to your purchase price, but your loss has little to no relation to my gain (unless I have insider information - fraud).
Final scenario. I buy at $5/share. You buy, not from me, but direct from the company, a new issue, at $10/share. Third Party buys another re-issue from the company at $15/share. The company takes our collective $30 and invests it in more efficient widget production, improving its bottom line and increasing the value of the company. We all sell our stock for $20/share - the current actual value. We’ve all gained, but no one has lost.
In fact, true "investment" is always a non-zero-sum game, a win-win situation, because of that very effect. It’s speculation - betting that a stock is under- or over-valued based on market inefficiencies - which is a zero-sum game. Day trading is a great example of this.
Great post, Mike. One small quibble from a few posts back: Money is also a store of value.