What Game Are You Playing?

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.

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.”

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.

Disclaimer: David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on ...

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