Unlike options, equity markets are not a zero-sum… it got me thinking with the last few weeks activity , where does peoples money go when stocks tank and panic people exit? Does money just vanish ? No one gains unless of course others are shorting or hitting the opposite side?
In terms of trading, it’s all just about the luck, if the buyers buy today and the mkt goes down then its bad luck but if the mkt goes up then its good luck. The overall mkt is just based on the value and not trading. However, that’s just my two cents.
equity markets is more like everyone deciding on a correct price. fun fact. 70% of trades are by algos. as businesses earn more, people naturally are willing to pay more at a higher price. so when i think of equity markets, i dont think of a pie that is in a fixed state. it is more like bunnies that keep reproducing.
options market though is zero sum. the only way you earn money is for someone else to lose money.
It would probably suck to be the guy who sold me his out of the money puts on JPM.
who knows, he coulda had an offsetting position. maybe he was short the actual stock. but there has been a pickup of people selling puts to collect a yield and claiming their constant performance. of course until ■■■■ blows up.
Who doesn’t?!?!
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Everyone can buy naked options, the real alphas sell naked options.
lol hopefully that fifty cent guy made a killing. i remember he was dropping a mil on the daily on 50 cent otm ■■■■ that profits on a blow up.
Of course the market isn’t a zero-sum game. That’s absurd.
A more interesting topic is whether or not Alpha is zero sum. bchad and I had some good debates on that one.
what was teh conclusion? my gut says it isnt. nothing about the alpha formula tells me that just because your portfolio has positive alpha that it would cause someone else to have negative alpha.
The gist of it came down to technicalities. If you look at just an index, say the R1000 Growth, the sum of the alpha generated by its constituents will be zero. That’s pretty simple math. And, bchad being the academic he was, insisted on leaving it there. I didn’t accept that as it wasn’t applicable to real life investing. IRL, we go outside benchmarks, there’s always some cash drag (or push in this environment), and, of course, fees. So my position is alpha is likely negative and certainly not zero, unless by coincidence. Combine fees with most active managers underperforming and it just doesn’t add up.
I guess we were both right. Just approached it from different directions.
Alpha is negative when fees and cash drag is included.
All rp is the rm and if rp equal rm then alpha is zero. But When you include Fees alpha will go down as rp will be lower than rm. Cash will also have an effect as rm doesn’t have cash. Majority of managers underperforming will not have an effect on alpha, it just implies that alpha is concentrated.
Any excess returns (+/-) generated from securities outside your benchmark will throw alpha off too. It’s possible to have net (post-fees) positive alpha. It would just require a lot of managers using cash effectively and going way outside their bench. Like a US small cap strategy that will throw 10% of its holdings into EM small caps.
This is actually a very complicated topic. It has been discussed before, in depth, by BChad.
It becomes extra etherial because stock market levels are part of monetary policy, managed by the Fed. Money is created, and vanishes. But again, it’s complicated.
Like most things it can be answered like this:
Short answer: Yes, it can vanish.
Long answer: Kinda, followed by 18 paragraphs detailing monetary policy, the supply of money, inflation/deflation, what qualifies as money these days, are we speaking domestically or globally, let’s sidebar and talk gold, crypto, government inefficiencies also destroying money, taxes, how Hayek banged Keynes’ mom, the independence of the Fed, and circle back to how money gets created in the first place all to come to the conclusion that money does seem to disappear but then it can also just materialize. So, kinda.