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Is Investing a Zero-Sum Game?

Reader-of-the-blog Peter is bringing the nihilistic heat:

Jesse – when you zoom out on investing as a whole, isn’t it all zero-sum game? Can’t we only have winners when other people are losers? And once you accept that fact, why is investing a game worth wasting time on? I could play an equally zero-sum game by not investing in the first place – and I’d save all that time/effort/stress etc.

– Peter, reader of the blog

Peter, ditch the pool floatie and put on your readers. We’ve got work to do.

What’s a Zero-Sum Game?

When you and your friends play poker, it’s a zero-sum game.

Five people contribute $20 each. $100 in. One player eventually wins and takes all $100 out.

$100 in, $100 out – that’s zero sum.

Peter’s question isn’t the first time I’ve heard someone ponder:

…the whole world is zero sum. The whole economy is zero sum. If my grocery store succeeds, I put your store out of business. People can only get rich by taking from others.

But I call B.S.

Zero sum equates to zero net progress. Do you think we’ve seen zero economic progress? I sure don’t.

  • Ride your new tractor to a sorghum farm in ancient Mesopotamia and tell them the world’s economy hasn’t progressed.
  • Bring some vaccines to smallpox-ravaged 16th century Europe and tell them the world’s economy hasn’t progressed.
  • Show an Apple computer to 1950 NASA and ask them if that’s progress.

The idea of a “zero-sum economy” is called the fixed-pie fallacy. It’s the (false) notion that “there is a fixed amount of income or wealth in a society and that one person can only increase their income or wealth by taking some income or wealth from someone else.”

Humans build stuff. We solve problems. We grow. That’s decidedly positive-sum. This is a well-known economic fact. We grow the pie. If you bet behind that fundamental truth over the course of a few decades, you’d be making a smart bet.

When you invest in the stock market as a whole, that’s the bet you’re making. You’re betting that humans will build, solve, and grow. It’s positive-sum.

But it’s worth noting that “beating the market” is a zero-sum game. “The market” represents the average return. It’s the same reason everyone can’t be above average (except in Lake Wobegon.)

Reader Peter is asking a different question: “Why invest in the first place?”

Is All Investing Positive Sum?

I don’t think all investing is positive sum. In fact, the stock market itself can be zero- or negative-sum at times. In short, I would say trading and speculation are zero- or negative-sum, but true investing is a positive-sum game.

But let’s start with crypto.

Much of the crypto behavior we saw over the past five years was decidedly zero sum. Every fortune created had an equal-and-opposite fortune lost. In most cases, thousands of people lost $1000 for one person to gain millions. If you add up those wins and losses, you’d get zero sum (or maybe even negative sum, if the crypto exchanges were taking a fee, like a casino).

How can I be so sure?

Because what economic value was created?! There was none. At least not over that short of a period. No tractors, no vaccines, no computers. Most of the cryptocurrency space is “money chasing money” in non-sensical ways.

Crypto might have positive-sum applications that create value in the future. For example, Visa creates positive economic value by securely processing payments. Crypto and blockchain tech could do that. But not today.

The problem with crypto is that zero sum games don’t help civilization. Too melodramatic? I don’t think so. When we zoom out on crypto, we see tons of human effort focused on something with no net benefit (at least for now). Charlie Munger calls it,

“…disgusting and contrary to the interests of civilizations.”

Charlie Munger

Tell me what you really think, Charlie…

But crypto’s not alone. The stock market has zero sum and negative sum examples too. Short squeezes, like GameStop, AMC, and BBBY, are a perfect example. Some people made fortunes off these stocks. Were those fortunes a function of true economic value creation? Absolutely not.

Instead, obscure market mechanisms created “big win/big loss” scenarios, with the sum of all wins equaling the sum of all losses. For each GameStop fortune, someone else was a GameStop loser. That’s zero sum!

Why Is There Poverty, Then?

“If the world/economy is positive sum, why are some people left behind? Why are there poor people?

I don’t want to dabble too deeply into politics or socioeconomics. I do want to discuss wealth distribution. After all, what good is personal finance and investing if not to help improve people’s lives?

Humans and our economies are naturally positive-sum. We build tools from stone and build houses from trees. We zap rocks with lightning and teach them how to do math (we call it a “silicon computer chip”). But certain styles of governance and economics are better at harnessing our productive nature and spreading the benefits around.

Unbridled laissez faire capitalism, for example, can be fantastically positive…but often for only a small group. The mean might be positive, but the median is neutral or negative. A few mega-rich and many poor.

Pure socialism, on the other hand, might appear equally positive for all, but it didn’t work in practice. Life in the Soviet Union was positive for government officials and decidedly negative for the proletariat. That’s what corruption will do. A few well off, many borscht.

Somewhere on this spectrum lies a sweet spot where:

  • Individuals feel motivated because their good/smart/hard work is compensated more than bad/dumb/lazy work.
  • But the weak, elderly, young, etc—those who cannot “produce”—are still cared for.
  • And a large swath of the population see marginal positive improvements in their lives.

Why is the successful guy only twice as good as the peons?!?! Because it’s an emoji cartoon, dummy. Just an illustration. In fact, your argument brings up a great point:

A bajillion hours of arguments, too many books and blog posts, and even some wars have been fought trying to find this sweet spot.

How much more reward should the successful people receive? How many unskilled people should be left behind? And to what degree are they left behind? I don’t want to start an argument here. But I think you’ll agree with me:

A sweet spot exists, and it’s worth trying to find it.

Closing Time

Long-term, diverse investing is not zero-sum. It’s positive-sum. It harnesses the biological drive of humans to build, grow, and improve their surroundings.

Economies wax and wane. The pie is not fixed. Importantly, though, the wax is greater than the wane! The pie grows!

And if you lay claim to a slice today, odds are that slice will be bigger in 30 years than it is today.

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