II. Is Someone's Gain Someone Else's Loss in Investing? | The World Seen Through Short-Term and Long-Term Perspectives
In investing, is someone’s gain someone else’s loss?
Thinking about it that way, investing can seem somewhat like gambling.
However, if we look closely, completely different worlds unfold in the short term versus the long term.
In this article, I will organize the values that short-term trading and long-term investing each focus on, and summarize perspectives for understanding investment gains and losses in a more three-dimensional way.
Investing and Zero-Sum/Negative-Sum Games
In the world of investing, is it true that “someone’s gain is someone else’s loss”?
A zero-sum game is a state where the sum of gains and losses of all participants equals zero .
If someone wins, someone else loses.
Typical examples include poker and mahjong.
In poker, the chips won by the winner exactly match the chips lost by the other participants.
Mahjong is a game where everyone competes for the starting points in each round, and the total sum of everyone’s points never changes from the beginning.
On the other hand, lotteries and horse racing are negative-sum games.
Because the house deducts a certain percentage as fees and operating costs, a loss for the participants as a whole always occurs.
Even if someone wins the first prize in a lottery, the structure is such that the total prize money is less than the total expenditure of the purchasers when viewed as a whole.
Horse racing is the same; since the payout is distributed after deducting the commission rate from the total amount of bets, a loss is always generated among the participants as a whole.
The World Seen Through Short-Term and Long-Term Perspectives
In a previous post, I wrote that money does not increase, it only moves .
The interest and dividends earned from investments are also not generated from nothing; if you trace them back, they are profits generated by companies, and those profits were born from consumers.
Looking at society as a whole, money is just moving from someone’s wallet to someone else’s wallet.
Based on this premise, investing from a short-term perspective approaches a zero-sum game.
Short-term investing (which might be more appropriately called speculation in this case) barely considers factors such as future corporate growth, technological innovation, job retention, value creation, or social contribution.
What it focuses on is generating one’s own profit through timing.
Stocks, investment trusts, and FX can be described as an exchange of money aimed at individual profit from a short-term perspective, in other words, a money game.
It is easy for a structure to emerge where short-term traders compete for profits within the same price movements, resulting in a world close to a zero-sum game.
On the other hand, investing from a long-term perspective looks at an entirely different world.
Long-term investing looks at factors such as future corporate growth, technological innovation, job retention, value creation, and social contribution.
To put it simply, this can be described as investing assets in ‘everyone becoming prosperous’ and ‘society becoming better’.
A world where the same amount of money makes life a little better, a little easier, or increases the little joys compared to now.
A world where the velocity of money rises moderately (= moderate inflation), and while expenses increase, income and options also increase.
This is the kind of world that long-term investing is looking at.
Even if money is just moving around without increasing, the depth of society as a whole increases with long-term investment.
Companies create value, that value spreads through society, and as a result, it is returned to investors as well.
The ‘increase in value’ that is invisible in the short-term world is at the heart of long-term investing.
The flow of short-term and long-term money intersecting in the market
Furthermore, in the market, it is not the case that short-term traders are only exchanging money with each other, and long-term investors with each other.
Both short-term traders and long-term investors are trading in the market at the same time.
Therefore, naturally, there are also flows of money from short-term traders to long-term investors, and from long-term investors to short-term traders.
As mentioned above, the flow of money from short-term trader to short-term trader can be considered close to a zero-sum game.
So, what kind of people (with what motivations) are moving money to what kind of people (with what motivations) in those other flows?
When you look at the flow of money from the perspective of “whose motivation to whose motivation,” the structure where the short term and long term intersect in the same market becomes visible in a more three-dimensional way.
I will consider the structure of capital movement by motivation from here on in the next post.
Summary
Investing cannot be described by the simple structure of “one person’s gain is another’s loss.”
From a short-term perspective, it approaches a zero-sum game because people are competing for profits amidst price fluctuations.
On the other hand, from a long-term perspective, corporate growth and technological innovation create value, and as that value spreads through society, the richness of life increases.
Even if money is just moving, there exists a structure where society as a whole becomes wealthier as value creation accumulates.
Because the short term and long term intersect in the same market, the flow of money becomes more complex.
Next time, I will further delve into the structure of capital movement from this perspective of “whose motivation to whose motivation.”