FREE NEWSLETTER
AMONG THE AREAS of law that have made me miserable over 16 years of practice, it’s the adversarial roles that have made me most miserable. My experience in labor and employment law has been particularly difficult because the interaction with opposing counsel is usually contentious, each side compelled to zealously advocate for their position.
Almost any type of litigation is a zero-sum game. One side wins, the other loses. Because the outcome is never guaranteed, those involved often engage in cut-throat, zero-sum behavior.
I’ve slowly come to realize that the financial world has a similar dynamic. Short-term trading usually delivers zero-sum outcomes, while longer-term investing offers positive-sum results. The game that investors choose to play determines the outcome they receive.
In a zero-sum game, rational actors seeking the greatest gain for themselves will necessarily do so at the expense of other actors. Trading amounts to a zero-sum game. Buyers hope to get a better deal at the expense of sellers, and vice versa.
By contrast, in positive-sum games, the overall pie is growing, so there are more spoils for everyone to share. Positive-sum games can be win-win situations. Investing for the long term in a broad market index fund, and thereby avoiding the risks inherent in individual stocks, is a positive-sum game because markets move up over time—and all investors can potentially win.
Moreover, the longer investors hold a diverse basket of stocks, the greater the likelihood that the engine of capitalism will produce a happy outcome. An added bonus: Investors can avoid the nasty “winner takes all” mentality that many short-term traders consciously or subconsciously have. For my own mental health, I prefer to play positive-sum games—whether it’s in my professional life or when investing.
John, I like your comparison of short term investing to the adversarial side of law practice. Zero sum indeed, at least in civil litigation.
On the criminal side, where I worked for 40 years, an ethical prosecutor who took seriously the obligation to do justice rather than just beat the other side meant an occasional “win win” was possible.
I had mentioned criminal law in the draft and asked JC to take it out because I wasn’t sure if my experience was the same as everyone else’s (whereas, labor law and family law seem to have wide recognition as being extremely adversarial in more than just legal analysis). When I prosecuted in the military, I felt I always tried to meet halfway remembering that often there are two (or more) lives impacted including the accused and the government holds a tremendous amount of power and should therefore give the defense every piece of information and not oppose reasonable extensions letting judge/jury decide the case on the merits, but my impression was that I was not in the majority.
While I am an adherent of long-term investing in index funds, I’m not sure that short-term investing is best thought of as a zero-sum game. If it was then the average short-term investor would do just as well during bear markets as he or she does during bull markets.
Certainly there is the possibility that short term investors are overall invested more than they aren’t, but traditionally short-term investing is opening and closing positions with a hope to benefit at other’s expense, taking one side of each trade hoping it’s the side that wins. These strategies are crafted to benefit from market movements in whichever direction it is moving. Some day traders even open their positions after the market opens and close them out before it closes. Strategies in between this and “buy and hold” could certainly be viewed as a combination of both.