|We show that share trading does
not create wealth. You need to be ruthlessly honest about your
chances in the market
Who gets the value?
Look at the financial life of a company. There is an initial investment
from the founders and sponsors. This is followed by a stream of
dividends and a final break-up or disposal. These cash flows accrue
to those who are shareholders at the time (see Equity
When one person sells a share to another, cash is
transferred from the buyer to the seller. This cash does not go
to the company. The corporate cash flows are not affected. The only
thing that changes is how those corporate flows are distributed
as between one shareholder and another.
The fixed-sum game
The 'fixed sum' is the total wealth (cash) generated by the company
over its lifetime. No amount of trading will alter that sum. In
cash terms, trading is zero-sum (the seller receives what the buyer
So share trading is not a value-added activity. It
is a transfer-of-wealth activity.
Share trading is a fixed-sum
The poker parallel
Or you might prefer to think of it as a zero-sum game, like poker.
Unlike poker, it is a game played between an enormous number of
different participants, with players continuously leaving the table,
staying away for long periods, coming back, ducking in and out and
retiring hurt. So it is more like the total of all poker games going
on in the world at any one time.
Also in common with poker:
- It is a game of skill.
- It is a game of probabilities with a dash
- The good player beats the bad player in the
- The disciplined player beats the gambler
in the long run.
- Even the worst player has the occasional
- Most players think they are better than they
- Players remember the wins and forget the
- Few players keep records to determine whether
they are really winning.
- Poor players prefer not to know whether they
are winning or not.
- Many poor players swear by strange and illogical
- Dangerously, it is possible to have a gift for
it, and be good at it.
- Most dangerous of all, the game is fun.
Winners need losers
The bad players play an absolutely essential role in the functioning
of the system: they are there to be the losers. Because otherwise,
in a zero-sum game, there would be no winners.
And in the fixed-sum game of share trading, the designated
losers are the retail investors. That means you. Where else are
the professionals going to get their money?
But you don't have to play
Remember, owning a share is not playing. You
are only in the game when you sell a share to buy another one. That
is when you pay costs to the professionals, and you bet your judgement
of the market against theirs. Do you want to play?