shminux comments on Open Thread, September 30 - October 6, 2013 - Less Wrong

4 Post author: Coscott 30 September 2013 05:18AM

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Comment author: shminux 30 September 2013 07:07:57PM -1 points [-]

are Vanguard's funds really as cheap as advertised, or is there some catch to them?

There is no catch, you don't pay anything other than their advertised fees. Andrew Tobias has been using them as an example of a great way to invest in the market for years. (His writings on investing are great, ignore anything he says about politics on his blog.)

Comment author: V_V comment score below threshold [+] (6 children)

Comment author: Lumifer 01 October 2013 02:45:01PM 3 points [-]

Nope, that's not how it works. Just because the transaction is zero-sum doesn't mean the value is zero-sum.

Consider (abstract) agriculture. You buy seeds, that's a "zero-sum" transaction, plant them, wait for them to grow, pick the harvest and sell it in another "zero-sum" transaction. Both your transactions with the market are zero-sum and yet... :-)

Specifically, stock market is not zero-sum game.Therefore the fact that (some) index funds (sometimes) make money does not imply that the everybody else does worse.

Comment author: V_V 01 October 2013 04:28:10PM * 0 points [-]

Consider (abstract) agriculture. You buy seeds, that's a "zero-sum" transaction, plant them, wait for them to grow, pick the harvest and sell it in another "zero-sum" transaction. Both your transactions with the market are zero-sum and yet... :-)

Yes, but you can't plant stock options in the ground, and in fact you can't really do anything with them other than selling them or keeping them and cash the dividends (assuming that you don't buy enough shares of a company to gain control of it).

Since different people can assign different utility to cash and can discount future utility differently, it is possible that a transaction is positive sum: e.g. consider an old person with a short remaining life expectancy selling all their stocks to a young person. But at the level of large investment funds and banks, these effects should mostly cancel out, therefore the stock market is approximately zero-sum (up to events that alter the amount of available stocks, such as defaults, IPOs and recapitalizations)

Comment author: Lumifer 01 October 2013 05:12:50PM * 2 points [-]

you can't plant stock options in the ground

Stock options are very different from stock shares. I assume you're talking about shares.

Stock shares represent part ownership of a company. The fact that you're likely to be a minority owner and have no control over the company does not change the fact that you are still legally entitled to a share of the company's value. If the company's value rises, the value of your share rises as well.

it is possible that a transaction is positive sum

If you're talking about personal subjective utility, every voluntary transaction is positive-sum. But that's irrelevant for the purpose of this discussion since here we are talking dollars and not utilons.

therefore the stock market is approximately zero-sum

You still don't understand. Public companies (generally) create value. This value accrues to the owners of the companies who are the holders of stock shares. In the aggregate, stock holders own all the public companies. If the public companies produced value, say, this year, the value of the companies themselves increased. This means that the worth of the stock in the stock market has increased -- even if no transactions have taken place. That is why stock market is not a zero-sum game.

Comment author: V_V 01 October 2013 09:22:14PM * 0 points [-]

Stock options are very different from stock shares. I assume you're talking about shares.

Yes, sorry about the imprecision.

If the public companies produced value, say, this year, the value of the companies themselves increased. This means that the worth of the stock in the stock market has increased -- even if no transactions have taken place. That is why stock market is not a zero-sum game.

I didn't claim that owning stock shares produces no value. I claimed that most trades involving stocks (those which neither increase nor decrease the amount of stocks) are zero-sum w.r.t. monetary value.

Consider Alice and Bob who have the same utility function w.r.t. money and the same discounting strategy. Alice sells a share to Bob at price X. Alice is betting that the total discounted utility from the dividends gained by owning the share indefinitely is less than the immediate utility of owning X, while Bob is betting that it is greater than that. Clearly they can't be both right. The gain of one is the loss of the other.

Comment author: shminux 01 October 2013 04:46:32PM -1 points [-]

Sounds like a fully general counter-argument against investing.

Comment author: V_V 01 October 2013 09:07:02PM * 0 points [-]

No, you can invest in index funds and make money or invest in securities not traded on the stock market.

shminux comments on Open Thread, September 30 - October 6, 2013 - Less Wrong

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