What Game Are You Playing?

Photo Credit: Alex Alexi ||As Captain Kirk once said (something like): “If you are stuck in a losing game, find a way to change the rules.”

You might be a very good trader. More likely, you are not. The markets are not like Lake Wobegon where all the children are above average. Personally, I think that I am probably an average trader, which is why I don’t trade much. That said, there is a reason to avoid thinking of trading as a way to make money. It is a negative sum game for those who are not market makers, specialists, or high frequency traders, whose computer algorithms generally make intelligent trades against order flow from everyone else.

Stocks derive their value from the stream of free cash flows that can be used for:

  • Dividends
  • Stock buybacks
  • Debt retirement, and
  • Intelligent investments that improve future free cash flows.

Though I am not bullish on the market over the next ten years (my model indicates 1.11%/year from the S&P 500 over the next ten years, not adjusted for inflation), I know that over the long haul that equities tend to prosper unless there is war on your home soil, famine, or severe socialism. Investing over the long-term is a positive sum game, but it means you must have the capacity to invest for the long-term, and own things that are presently out-of-favor.

In short, people don’t make money on average when they trade. People make money as they hold their assets and wait.

2 thoughts on “What Game Are You Playing?

  1. Everything you say is true David. But I’d like to give some encouragement to traders. My personal experience is that it is possible for a retail trader to consistently and regularly beat the market for many years. However, you must be relentlessly honest in benchmarking your results and understand the statistical significance of it. And you have to find the trading strategy that fits your personality and love what you do. That last bit is corny I know, but it’s true no matter what you are doing

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