Why the Stock Market Isn't a Zero-Sum Game

Master. This time, we're going to discuss one of the most fundamental questions in understanding the world of investing: 'Is the stock market really a zero-sum game?'

By listening to the opinions of the three of us on this topic, you should be able to get a clear picture of how you should view investing.

Mew

Before we begin the conversation, we must first clarify the definition of the term.

A Zero-Sum Game refers to a situation where the sum of all participants' gains and losses is '0'. In other words, one person's profit must come directly from another person's loss.

Think of a poker game. The pot is fixed, and if I win money, someone else must have lost that exact amount. The size of the pie is fixed; it's a battle over who gets a bigger slice.

Many people misunderstand the stock market to be the same. They think that if I made a profit by buying a stock low and selling it high, someone must have lost money by buying that stock at a high price from me.

But to state the conclusion first, the stock market is fundamentally a Positive-Sum Game. This means it's a game where the total sum of participants' gains can be greater than zero—that is, the size of the entire pie can continuously grow.

Why? It's because of the activity of 'corporate value creation.'

Let me give you a very simple analogy. Imagine, Master, that you've opened a small bakery. If you buy flour and sugar for $10 and bake delicious bread that you sell for $30, you have created $20 of 'new value'. This isn't money you took from someone else; it's the result of creating value that didn't exist in the world before, through your skills and labor.

Companies are the same. Apple assembles parts to create an innovative product called the iPhone, and pharmaceutical companies research chemical compounds to develop new treatments. In this process, the company makes a profit, and it reinvests that profit into R&D to create even better products, or expands its factories to increase production. As long as the company's assets and profits—its 'intrinsic value'—continue to increase, the total value of the 'stock' that proves ownership of that company also grows.

The entire stock market is the sum of all these value-creating activities by countless companies. Therefore, as long as the economy grows in the long run, the pie of the stock market will continue to expand. This is the core explanation for why the stock market is not a zero-sum game.

Kurumi

Myu-tan's explanation is so stiff, but the core point is spot on! Kurumi-chan will explain this in a much more heart-pounding way!

My Lord! That 'value creation' thing Myu-tan talked about—you don't need to think about it so hard! It's dreams and innovation itself!

Buying a stock isn't just buying a piece of paper. It's like betting on the progress of humanity! Buying stock in an electric car company is buying a piece of the dream to 'create a cleaner world.' Investing in an AI chip company is investing in a 'future that surpasses human intelligence'!

When these amazing companies work day and night to change the world and make people's lives more convenient, their value naturally goes up, right? Then my Lord, as a shareholder of that company, gets rich along with them! This isn't a gamble where you steal someone else's money; it's a festival where we all build a better world together!

Think about it. The people who bought Amazon or Google stock 10 or 20 years ago are incredibly wealthy now. Did they get rich by snatching everyone else's money? No! It's because Amazon and Google created new markets in e-commerce and information search, completely changing human life, that their corporate values grew by hundreds, even thousands of times! The pie itself grew to an unimaginably huge size!

That's why stock investing is a hopeful activity. It's not a gruesome battlefield like a zero-sum game where you have to beat the person next to you to survive. It's a joyful adventure where you become partners with excellent companies and grow together!

Kurumi's Heart-o-Meter Investment Score: 100/100

The stock market is belief in human progress itself! What game could be more hopeful than this!

Mikael

Sigh... Kurumi. Your boundless optimism makes me nervous just listening to it. Human, if you jump into the market with such naive thoughts, nine times out of ten, you will leave with nothing but scars.

It's not that Mew's explanation and Kurumi's argument are theoretically wrong. They're right. On a macro level, over a timeline of decades, the stock market is clearly a positive-sum game. Humanity has progressed, and the economy has grown.

However, that's the story when you're looking down at the 'forest' from the sky. The 'path between the trees' that you actually walk is a completely different world. In the timeframe of your investment—a day, a month, a year—the market exhibits brutally strong zero-sum game characteristics.

Why? Let's say a stock you bought for $100 today becomes $100.10 an hour later. Did the company's intrinsic value grow by 0.1% in that one hour? No. It's simply that someone appeared who was willing to pay you $100.10 for that stock. In that momentary transaction, your profit came from that person's higher purchase price.

This is the essence of the short-term market. It's a zero-sum game created by supply and demand, and by human greed and fear.

The problem becomes even more serious when you enter these areas:

• Day Trading: The act of buying and selling dozens of times a day has nothing to do with a company's value growth. This is a perfect zero-sum game where you can only win by taking money from another participant.


• Derivatives (Futures/Options): This market is inherently a zero-sum, or even a 'negative-sum game' when you factor in fees. It is designed so that someone's profit is defined by someone else's loss.


• Short Selling: The act of betting on a stock price decline is the same. A structure where you profit only when the price falls is predicated on the losses of other investors who were hoping for a price increase.

In conclusion, just because the 'essence' of the market is positive-sum, there is no guarantee that your 'investment experience' will be. On the contrary, the moment you enter the market without a long-term perspective and philosophy, you will find yourself in the middle of a battlefield swarming with countless zero-sum players.

Mikael's Risk Score: 80/100

Do not blindly trust in theory. The rules of the game change completely depending on the timeframe and method of your participation.