Original article published on the 28th January 2011 by Juan Ramón Rallo
Following on from our recent discussion about the viability of the stock market as an instrument of long-term investment, another one of the objections that usually comes up is: “Not everyone can win in the stock market”, “If somebody wins it is because he bought cheap from somebody or sold high to somebody else, and therefore that other person is losing”. This fear is a reflection of the widespread mercantilist view that the economy is a zero-sum game. But over three centuries it should be obvious that, thanks to economic growth, all members of a society can win. So why then do they not understand that every investor can win in the stock market?
The reason for their not understanding probably comes from not knowing the exact nature of stocks. A stock or share is no more than a part of the property rights of a business: whoever buys all of the shares becomes the sole owner of the business; whoever acquires 10% will have the right to keep 10% of the assets of the business and 10% of its future profits; and the same with whoever possesses 0.00001% (the different methods of control each one would have over the management is another issue).
This explanation might seem trivial, but it really is not: whoever buys a share buys part of a business; part of its property and its future production. Or, to put it another way, whoever buys a share is not buying a lottery ticket or entrance to a casino… it’s another matter if a share is used as such (any object can be used speculatively). In effect, not everyone can come out as winners in games of chance, as they are games that do not generate wealth and whose only purpose is to redistribute the wealth of its participants.
On the stock market, however, things work differently. Stockholders with a long-term mentality do not enter into the stock market to redistribute existing wealth, but to take possesion of future wealth that companies will generate. The continued profits of a company – which is no more than the monetary expression of making goods or services worth more than the cost to produce them – enrich the stockholder either directly (through dividends) or indirectly by increasing the net worth of the company which he owns (reinvestment, stock repurchase, debt repayment…).
Can every company grow in the long-term? Without a doubt yes, purely because of Say’s Law: production buys production; the increase in the supply of iPads –and the income derived from it– make up the demand to absorb the increase in supply of, for example, Chinese coal.
Is every company going to grow in the long term? Most likely no, because human beings are fallible and make mistakes when investing –many times for political reasons–, but the mistakes of one company create opportunities for profit for other companies. For that reason, investing in a particular share –in a particular company– without much knowledge of the topic can be very risky and can give others the opportunity to profit at our expense. However, investing periodically in one of the best stocks of a country (in a stock market index like the Dow Jones or Standard and Poor’s) ensures that the loses of some companies will be compensated by the extraordinary profits of others over time. As I have said many times: the historical average of the US stock market after inflation is around 7% per annum… even when in the last 200 years tens of thousands of American companies have gone bankrupt.
If in these last 200 years more people had saved and put more money into the stock market, this 7% of annual return wouldn’t have been redistributed between more people, but rather the entire American economy would have been capitalized on it even more: companies would have produced more goods and services and a greater number of stockholders would have become rich. We should never forget that, contrary to what is maintained by the quack Keynesians, saving is the engine of investment and accumulation of capital.
In the long-term, it is possible for everyone to win in the stock market for similar reasons that it is possible for everyone in the world to improve their standard of living in a market economy. Only if we believe, like Tertullian did in the third century or the Club of Rome 50 years ago, that we have already reached the limits of our economic development could we coherently assert that not all investors in the stock market can win in the long-term. But this, fortunately, is a very unlikely scenario which, incidentally, would make a public pension system even more impractical.
And having come to this point, I will tell you another day, if you will allow me, about the supposed “risks” of the stock market and why pension funds are usually a terrible form of investment in Spain.
Original article in Spanish: http://juanramonrallo.com/2011/01/%C2%BFpueden-ganar-todos-en-la-bolsa/
FAQs
Best way to describe it: It's possible but not probable," says Robert Laura, author of "Naked Retirement: A Stimulating Guide to a More Meaningful Retirement" and president of SYNERGOS Financial Group. According to Laura, the average individual investor has little chance of beating the market.
Is it possible for everyone to make money in the stock market? ›
The stock market is a legitimate investment opportunity for many people, and it is possible to make money through smart investing. However, it is also important to recognize that the stock market carries risks and that not everyone will be successful.
Can everybody win in trading? ›
Having spent some time in a place where they stake people to day trade, this is what it looks like: 95% of people will lose it all (that was me). 4.9% will “make money,” but after netting everything out including the stress they'd have been just as well off if they had gotten a regular job. 0.1% will make it outright.
Can people beat the stock market? ›
It is relatively common to beat the market for 1–3 years at a time. That can largely be explained by luck. But the data clearly shows that even professional fund managers are unable to beat the market consistently over a longer period of time, like 10–15 years.
Has anyone become a millionaire from stocks? ›
Investing in the stock market remains one of the most tangible ways to become a millionaire. It is available to everyone, and it does not require luck, a rich family background or entrepreneurial genius. The only differentiating factor is the number of years it takes every individual to get to those million dollars.
How many people have success in the stock market? ›
Out of the 45.24 lakh individual traders in futures and options (F&O) in the financial year 2021-22, only 11% made profit, shows a report by Securities and Exchange Board of India (Sebi).
How much money do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
How much money do day traders with $10,000 accounts make per day on average? ›
With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Is trading really skill? ›
To become a trader, an individual will need a background in engineering, maths, or hard science, instead of having only business or finance background. Traders will need both research as well as analytical skills to keep track of day-to-day chart patterns and economic factors that have an impact on financial markets.
According to various studies and reports, between 70% to 90% of retail traders lose money every quarter. This article will discuss the main reasons retail traders lose money and how they can enhance their performance and profitability.
What is the 3-5-7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What would it be worth if you invested $1000 in Netflix stock ten years ago? ›
So, if you had invested in Netflix ten years ago, you're likely feeling pretty good about your investment today. A $1000 investment made in March 2014 would be worth $9,728.72, or a gain of 872.87%, as of March 4, 2024, according to our calculations. This return excludes dividends but includes price appreciation.
Why do 90% of people lose money in the stock market? ›
Staggering data reveals 90% of retail investors underperform the broader market. Lack of patience and undisciplined trading behaviors cause most losses. Insufficient market knowledge and overconfidence lead to costly mistakes. Tips from famous investors on how to achieve long-term success.
Can anyone beat S&P 500? ›
Yes, you may be able to beat the market, but with investment fees, taxes, and human emotion working against you, you're more likely to do so through luck than skill. If you can merely match the S&P 500, minus a small fee, you'll be doing better than most investors.
What are the odds of winning in the stock market? ›
Understanding the Coin Toss
Let's assume that at a given moment in time, a stock could just as easily move up as it could move down (even in a range, stocks move up and down). Thus, our probability of making a profit on a (short or long) position is 50%, which is the same as a coin flip.
What percent of people beat the market? ›
On average, only 46% of funds outperformed the total market over monthly horizons; 39% beat the market over 12-month periods; 34% over decadelong horizons; and a mere 24% for their full history. Fees are part of the problem, of course.
What are the chances of making money in the stock market? ›
Step 2: Hold on for at least 10 years
| Holding Period | Odds of a Positive Return |
|---|
| 1 year | 73% |
| 3 years | 84% |
| 5 years | 88% |
| 10 years | 94% |
Jan 1, 2024
