The Amateur Financier

It’s an assumption common to just about every human on the planet: in order for one person to benefit, someone else has to lose.  For example, if you’re playing poker with your buddies on Friday night, any profit you make off of the game will be exactly equal to the total losses of your friends.  When you have a hot streak and turn your twenty dollar stake into a fifty dollar pot, it means your buddies must have lost thirty dollars collectively.  Similarly, if you have a horrible night and lose all your money, then one or more of your buddies will walk out the door twenty dollars richer.   As a group, you and your friends will still have the same amount of money with which you came into the game; the only difference will be how that money is distributed.

Such a situation is known as a zero-sum game; the amount of money (or other object of value) is limited to the amount available at the start of the game, and the only affect that the game will have is to shuffle around the money to the various players involved.  (Of course, it doesn’t have to be a literal game; the term is applied to any situation where the only money involved comes from other participants.)  In addition to our poker game example, you can also find zero-sum games in any form of gambling (the money that is won comes from other gamblers, less the casino’s profit margin).  In most sports, any win by one team means a lose by the other; the number of wins is fixed each season, and only so many wins will be distributed.  Even sharing a dessert is a zero-sum situation: if you take a bigger piece of pie, there’s less left for me.

With examples of zero-sum situations abundant in the rest of life, it’s not surprising that many people assume that our entire economy is a zero-sum game.  There’s the underlying belief that there is only a fixed amount of money, and every dollar I get is one less dollar available to you.  You can hear this assumption embedded in our language, with talk about one group or another (usually the already well off) getting ‘a bigger piece of the pie’, as if the economy was served warm and flaky, with a whipped cream topping.  According to this belief, any benefit to another person or group hurts you, cutting down the money supply and decreasing the amount of pie left for you.

Luckily, this is not the case.  It’s possible to create situations that do benefit all the parties involved, something that’s not possible in a zero-sum situation.  (Unless you’re playing with someone who WANTS to lose money, but that rarely happens if all your friends are rational.)  Let’s go back to our pie example.  If you have a piece of pumpkin, which I love but you loathe, and I have a piece of coconut creme, which you enjoy but I detest with the fiery fury of ten thousand suns, we’ll both be better off by trading than we would by keeping what we have.  Similar trades can occur with money; if you put a value of $5 on my piece of coconut creme pie whereas I put a price of $3 on that same piece, we can both benefit when I sell you the piece of pie for, say, $4.  Every voluntary trade between people will increase the wealth of the participants, if only by the cost of a piece of pie.

Furthermore, the economy is not a fixed system; it’s growing all the time.  The pie is getting bigger with each passing decade, ensuring that, even if the pie is not divided as fairly (and of course, if we are not the richest people on the planet, we’re going to assume the division is unfair) as we would like, the size of piece will continue to get bigger.  As more people contribute to the economy, the amount of everything, from desks to microchips to blogs to, yes, pie, increases, making everyone who shares in the economy wealthier.  Things become cheaper, money is easier to acquire, and the quality of life slowly rises, as it has through most of history.  In a word, growth.

What does all of this mean to you, the individual investor?  In a nutshell, money is a tool, nothing more, nothing less.  There is nothing evil about money; it’s simply a medium of exchange, so you don’t have to carry ingots of gold or a flock of sheep with you whenever you want to acquire some other goods.  Money is only as evil as the purpose to which it is put; pay people to kick orphans and stomp on puppies, and you’ll be a pretty bad person, but it’s no more the fault of the money than would be the philanthropy of another wealthy person.  Mostly relevant to our topic, if you have more money, it doesn’t necessarily follow that everyone else has to suffer with less.  In fact, assuming you use your money well, everyone who trades with you can become wealthier in the process, including you.

If you follow the dictates of your conscious and religion as best you can no matter your level of wealth, you will be a good person, regardless of whether your net worth is one million dollars or one thousand dollars.  Do that, and remember that just because you have money, doesn’t mean you took it away from someone else.  (Unless you’re a thief or Bernie Madoff; in those cases, I can’t help you.)

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