A fishing buddy (Camp Kotok regular) and thoughtful financial professional Steve Blumenthal opened one of his weekly missives with this paragraph, in which he introduced a commentary from Ray Dalio.
It’s not the substance of Dalio’s post that I want to focus on, but a key word usage by Ray Dalio and quoted in Steve’s introduction:
“Raymond Dalio is an American author, investor, hedge fund manager and philanthropist. Dalio is the founder of the investment firm, Bridgewater Associates, one of the world’s largest hedge funds. From a humble beginning, he learned from his failures and created a repeatable process based on the system dynamics he now openly shares with you and me. It’s a road map of sorts for understanding and investment positioning. A playbook that has enabled him to grow to become one of the world's 100 wealthiest people, according to Bloomberg. Investing is a zero-sum game. That means for every winner there is a loser. Clearly, he and his team are doing something right. So, for me, I tune in to learn. His recent post, ‘To Help Put Recent Economic & Market Moves in Perspective,’ caught my eye and I’d like to share it with you today.”
(Note that I do not have permission to share that Ray Dalio post, so readers who want to read that will need to search for it and obtain it elsewhere.)
A couple sentences in the paragraph jump out at me: “Investing is a zero-sum game. That means for every winner there is a loser.”
I disagree with this use of the term zero-sum game.
In every trade there is a buyer and a seller. So in the immediate instance of a single security transaction, at the moment of execution there is neither a winner nor a loser; there is simply an exchange. A price is set. Two strangers reach a deal using a third stranger (an intermediary). All that single trade represents is the consensus price at a cosmic instant of time. An instant later it’s over, and the market price may then go up or down. At any future time, if the market price is higher than the price at execution, then the buyer is the winner, and the seller is the loser, at that point (and vice versa). So, yes, any particular trade is a zero-sum game.
But is investing itself a zero-sum game? It may be, from the limited perspective of any one player. Bridgewater Associates, CMG Capital Management (Steve’s outfit), and Cumberland Advisors certainly strive to consistently emerge as winners in their investing activity. That is, we want to be better, smarter investors than our counterparties are in the trades we undertake for the benefit of our clients. But note that if the entire investment playing field was on a zero-sum game footing, the net collective result for all investors would be zero. And that’s before the transaction costs and fees.
So how about investing as a whole – the entire arena of investing, or of economics, for that matter? It’s a fundamental tenet of our capitalist system that if all players in the game compete to be the best, most successful players they can be, the system as a whole will be healthy and dynamically stable and continue to improve over time: “A rising tide lifts all boats” says the cliché. The players may be in the game to get a piece of it for themselves, but they do produce the greater good because markets are clearing arrangements and lead to better efficiencies than other systems do.
So, obviously, on the macro level, the economic system and its investing subsystem are not zero-sum games. We all win when the system is in good shape; but conversely, we all lose if we injure the system.
Today, the system is under more stress than it has been in a decade. To understand why, we must turn to a fundamental principle of ecology. Our human systems are ultimately a subset of the natural system that is Planet Earth (which itself is a subset of an even larger system). And everywhere we look in the natural order, we see the same thing: Competition and cooperation go hand in hand.
No player in our global economic and investment game is an island. At the same time that we compete with one another, we also cooperate; and cooperation is just as fundamental to capitalism as competition is.
Our economy has never been more global, and while we may want America to be first – may justifiably believe that our democratic capitalist system is the best system and should prevail – we are hugely dependent on our international trading partners, as they depend on us. Think of it in the way that about 35% of the economic results of the S&P 500 index of American companies is derived outside of the United States.
So when President Trump aggressively disrupts global trade, imposing ill-conceived tariffs that shock the system, he may hurt America just as badly as he does our allies and economic adversaries.
In an article titled “Trump Has Promised to Bring Jobs Back. His Tariffs Threaten to Send Them Away” (New York Times, Jan. 6, 2019: https://www.nytimes.com/2019/01/06/business/trump-tariffs-trade-war.html), author Peter S. Goodman demonstrates with several hard-hitting examples how the Trump-Navarro Trade War is damaging American manufacturing in ways that will be hard to reverse.
“‘It’s killing us,’ said the chairman of [EBW Electronics], Pat LeBlanc, 63, a Republican who voted for Mr. Trump. He now expects the president’s tariffs will chop his 2019 profits in half. ‘I just feel so betrayed. If we fail because the company is being harmed by the government, that just makes me sick.’” Across the US manufacturing base, such complaints are multiplying and intensifying as the trade war disrupts factory operations for which imported parts are critical. Says Goodman, “Trade in components has grown in recent years, as American industrial prowess has become increasingly dependent on access to the global supply chain. Back in 2009, American factories imported some 20 percent of the electronic products and computers they folded into their operations, according to an analysis by the United States International Trade Commission. By 2016, the share had risen to 25 percent.” True, Trump’s tariffs have taken a bite out of China, too, contributing to a faltering Chinese economy. But, as Goodman points out, “Those worries have filtered back to the United States, amplifying concerns about the global economy, sending stock markets plunging, and putting pressure on American companies, like Apple, that sell goods in China.”
Factory orders in the United States, China and Europe have weakened, too, deepening the sense that global growth is slowing. In the natural world, if the top predators in an ecosystem have a particularly good string of years and decimate their prey animals, then a point will be reached where the population of predators, too, collapses to a more sustainable level. That’s basic ecological science, and it’s just common sense.
It works the same way with companies and countries. What goes around comes around. Life is not a zero-sum game, and neither, on the macro scale, is investing or participating in the global economy.
We’re fully invested in our US ETF accounts. We expect the US-China truce to continue and that a form of a trade deal will result. That is why we expect the stock market to go much higher. If we are wrong and if the tariff rate goes up to 25% and expands as Trump has threatened, we will be wrong. Under that adverse scenario the Trump-Navarro Trade War will likely trigger a full blown recession. We are not in a zero sum game.
David R. Kotok
Chairman and Chief Investment Officer
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