A story about Apple and Orange (and Steve and Bill)
By N. S. Hou [Canada]
When we talk about stock investment, most of us will immediately think of the epic scenario where walls of computer screens are popping up crazy numbers and stock traders are all intense and focused. Stock exchange, by selling and buying shares according to speculations, is probably what many of us think of as the only or best way to invest in stocks. But is it, really?
Before giving you an example, I’d like to remind you of the two ways we gain from stock investment: 1) the return from buying and selling shares and 2) dividends from the profits made by companies.
Here’s a story about Steve and Bill:
A stock market consisting of two publicly traded companies, Apple and Orange, has a total of two stock investors, Steve and Bill. To beat the market, that is, to gain a greater return than the market average, Steve and Bill start to trade their shares with each other based on their short-term speculations. Since this market only has two investors, the market return would only be dispersed between Steve and Bill. This means that when one of them gains more return than the market average, the other must lose.
This is because when we try to beat the market, we investors treat each other as competitors (if not enemies). Stock investment in this way (return from buying and selling shares), is a game that will always end up with someone in the market losing.
But are we necessarily enemies of each other??
Of course not! We can all win through passive investment. That is, all investors can gain return by receiving dividends from profits made by all of the companies in that same market. In the case of Steve and Bill, they both share the market return generated from Apple’s and Orange’s business earnings (the true return of the entire market). More specifically, if Apple’s current weighing by the index is 60%, and Orange is 40%, both Steve and Bill will put 60% of their own investment in Apple, and 40% to Orange. All they need to do now is to keep these shares forever, with occasional adjustment to fit the existing market portfolio, and collect their returns with the exact same rate. Therefore, the basis of passive equity investment is held in the notion that the wealth of a society is driven by how well corporations perform and by extension, how the economy runs as a whole.
Investor friends, you don’t need to make any profitable trade-off, sit back and relax!
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