Today at TILE we talked about the relationship between “winners and losers” in the market. Specifically, when someone loses money, does it mean another person makes money? It is a great question, because it sometimes feels as if there are more “win-lose” than “win-win” situations in life, when everyone comes out ahead. The market, reflecting real-life, has examples of both.
The best market environment in which there are multiple winners is an expanding economy – the economy and market are growing, which means there is room for multiple people to benefit. Today, good examples (believe it or not they exist!) of growing industries are microfinance and the green market. New investments, increasing demand from consumers, and growing awareness means that companies that enter this market are finding it easy to expand, grow, and “win.” To make the examples come to life, try to think back to just a few years ago… were you as interested in purchasing “green” merchandise? Did you even have a choice between “green” and “not-green?” Had you heard of microfinance? The stock market, in general and especially when it is going up in value, works in a similar manner. While a trade depends on the existence of both a buyer and seller, it doesn’t mean the seller loses when the buyer buys (or vice versa). For example, let’s say you purchased a stock for $10 and sold it for $20 (good trade), you are a winner. Let’s say the seller in the transaction purchased it for $20 and then waited until it reached $25 to sell. They “won” too! As long as the market keeps expanding, everyone wins.
The opposite scenario, “win-lose,” takes place in the economy and in the futures market. When Snapple and Vitamin Water were first introduced to the market, it was great for all the companies creating the new products. However, it was not so great for companies like Coke and Pepsi – their customers were now drinking Snapple instead of soda, so they lost market share. This is called a “substitution effect.” The market for drinks stays the same, but new competitors take market share away from traditional players – not everyone wins. The futures market is different than the stock market because there is always a winner and loser. One person bets the value of the commodity (i.e. sugar or gold) will go up and one bets that it goes down. When you close a trade one side has a gain and another a loss. Definitely not a win-win.
What about the “I’m not so sure if there is a winner or loser” scenario? Today, the best example of this gray area may be the guarantee programs being offered by the government to banks and private equity firms that invest in failed institutions. On the one hand, it is great that the FDIC is finding other people to purchase troubled assets and banks – they will be much better at running them than the government, they are the only ones interested in buying the assets, and it means the FDIC doesn’t have to take another hit to its insurance fund (which stands at only $10.4 billion as compared to more than $50 billion a year ago). On the other hand, are the incentives too good, leaving losers on the other side? For example, as of August 31st, the government provided “loss sharing arrangements” on over $80 billion in loans, which could lead to real losses of over $60 billion. That means that if the new owner encounters losses on the investment, the FDIC (or you, the tax payer) covers nearly all the downside! Is it a good trade-off if the new investor gets all the upside and the Government (or you, eventually) takes only downside risk?
In terms of your own financial identity, maybe take a moment in the next day or two to consider the “win-win” versus “win-lose” scenario. Whether deciding what drink to pull from the shelf at the store, the type of light bulb you pick for your dorm room, or how you choose to invest (stocks, options, futures) there is always another side of the coin.
- Amy