Stocks Are a Zero Sum Game

Stock market is a zero sum as long as stocks don't pay dividend. Participants are placing bets against each other. For example, if total money supply is 50 trillion, and we decide to invest all of this money in stocks, the market will go up. We will marvel at how high the stocks are. And when we sell them all to get our money back, we are going to get back exactly 50 trillion. But it will be redistributed between participants. Some will get more than they put in, some will get less. Not a penny more or less. Stocks are the place to be when the money supply is inflating, not when it is deflating.

Many baby boomers have stocks. When they need to sell, they need to find buyers. Given that the population's worker/retiree ratio is changing with more and more people retiring, the numbers of buyers will fall short. There won't be enough demand. Thus when an entire generation of boomers are selling, they are not going to get the prices they hope for.

We can demonstrate this with a simplified example.

Mary has 10K in the stock market (or let's say she has a restaurant). Joe has none. Adam has none. Joe offers to buy it for 10K because he thinks the restaurant will do well, Mary sells. Favorable things happen and Adam thinks he wants to buy the restaurant for 20K from Joe. Joe sells. Then things do not go as good as Adam hoped. He agrees to sell it to Mary for 10K.

At the end, stocks are priced at 10K only because people agreed on it. As they went up to 20K and then down to 10K, stocks did not generate new money. Only people agreed to buy sell them at different valuations and they used their existing money supply.

At the end Mary did not loose or gain. Joe gained 10K. Adam lost 10K.

DOW can trade at 20K tomorrow and it is not going to make a difference on how much money our economy has. It is not going make a recovery. It is not going to make it easier to have a job. It is not going to help us import stuff and enjoy a better life style. This is because when it is at 20K, 1 American will sell at that price and will feel rich, and 1 American will buy at that price and will hope to get richer. But at aggregate level, the gain on total economy is zero. Only Adam paid to Joe. Total money of Adam+Joe remains the same no matter what the stock price is.

So, are we at 10K or are we at 20K valuations now? Is it time to buy stocks? Here is the big picture:

http://www.tradingstocks.net/html/near_bottom.html