Stock market not a zero sum game

March 8, 1: One of my consistent themes is that, in most cases, the more you trade, the worse you do. The logic behind this is that, unlike investing, trading is a zero-sum game: When you throw in transaction costs, moreover, trading becomes a negative-sum game: First, you have to draw a clear distinction between "investing" and "trading.

There is no other reason to trade. Investing in a diversified portfolio of stocks is usually a positive-sum game: The only way to exceed the "investment return," meanwhile, is to buy good stocks and sell bad ones.

Is the Stock Market a Zero Sum Game? | Pragmatic Capitalism

If a trader does this well, he or she will exceed the market or "investment" return. Stocks have to be owned by someone, though—even bad stocks—and the trader who bought the bad stocks from the better trader will lag the investment return.

In a case in which there are only two traders, the winning trader will exceed the market return by exactly the amount that the losing trader lags it before costs. In an essay called "The Arithmetic of Active Management," professor William Sharpe explains the phenomenon this way: The gross return of all traders in a market must equal the market return.

Depending on the relative skill or luck of the traders, however, the return of each particular trader might be very different: What the Slate reader is missing, in other words, is the distinction between "investing" and "trading.

Because it is impossible for the aggregate "trading" return to exceed the "investing" return, every dollar that has been won by one U.

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