The Fixed Sum Game

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 Markets).

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 pays)

So share trading is not a value-added activity. It is a transfer-of-wealth activity.

Share trading is a fixed-sum game.

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 of psychology.
  • The good player beats the bad player in the long run.
  • The disciplined player beats the gambler in the long run.
  • Even the worst player has the occasional winning streak.
  • Most players think they are better than they are.
  • Players remember the wins and forget the losses.
  • 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 systems.
  • 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?