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Don’t Stock Pick, Trade Currencies, or Market Time…Don’t Do it!

[/fusion_text][fusion_text]What do stock picking, currency trading, and market timing all have in common? You can make a lot of money at them. Wait, you weren’t expecting me to say that. Let me continue. You can make a lot of money at them only if other people lose a lot of money at them. All of the endeavors listed above are zero-sum games. To be abundantly clear, it’s not a good idea to play any of them.

By definition, a zero-sum game is such that any gain by one person is offset by a loss by another person. There’s no real creation of economic value or addition to overall wealth. It’s transferring money from one person to another. It’s like the guys on the teeter totter. One can only go up if the other one goes down.

Let’s look at an example. Say you decide that you’re really good at timing when to get in and out of stocks. You think that stocks have had a great run and we are overdue for a crash. You sell all your shares. In order for markets to work, there has to be someone to buy the shares. He/she must be thinking it’s a good time to invest. Only one of you can be right. If you time it brilliantly and are able to come back two months later and buy all your shares back at a lower price, there has to be someone on the other side of that trade too. To oversimplify a complex world stock market, let’s assume it’s the same person who bought your shares. Your gain came from his/her loss.

The same logic works for stock picking and currency trading. If you are going to outperform an index, someone else has to underperform it. There are two groups of people, index investors and active managers. Index investors cumulatively own the entire market. That means that active investors also cumulatively own the entire market. Math dictates that in order for an active investor to win another one has to lose.

Now for the real kicker, there are investment costs to consider. Each time you trade anything it costs money. It also takes a lot of time to research, which costs more money, especially if you are hiring a manager to do it for you. Portfolio managers and brokers can be really expensive.

I guess that you could say that after expenses, all three of these activities that you’re never going to do again, are actually a negative sum game. That’s even worse. No wonder you’re never going to do them again.[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.