Broad Market Investing

Every week my dad organized a family chess tournament among the kids, offering one dollar to the winner and an additional dollar if that winner could go on to beat him. I never lost one of those tournaments which made them increasingly fun for me but decreasingly fun for the other siblings. Eventually he added a prize for second place to keep the other kids interested in competing.
Chess is regarded as a “zero sum” game because the number of winners and losers is exactly the same. For every winner, someone has to lose. In the investing world there are also many examples of zero sum investments. This would be an area where you win by someone else losing or lose when someone else wins. The buying and selling of options is an example of zero sum investing.
In other areas zero sum investing works a little differently. For example, let’s suppose in your town there is an intersection with gas stations on each corner. Each day a pretty stable flow of cars choose where to buy gas and as they do, some stations’ revenue increases while others decrease. The total gas sold at the intersection remains stable, but how much each station sells is constantly changing. If one of those stations went out of business, would the amount of gas sold on that intersection change? No, it would just shift to the others.
Unlike with chess, a zero sum game in investing can actually be played to your advantage to reduce risk and improve the likelihood of success. In fact, during the gas wars of the 60’s and 70’s some major oil companies played this game by effectively buying out all the gas stations at the intersection. This allowed them to focus on the total gas sales at the intersection, with no concern as to which station a car actually stopped at.
Surprisingly there is a similar option for regular investors. Rather than trying to pick which “station” or stock is likely to survive, they can buy pooled investments that hold large baskets of stocks. In this way they can reduce the risk of individual company failure and focus more on the economy as a whole or on a specific sector. These are sometimes known as index funds, or ETF’s (exchange traded funds) which essentially allow investors to buy the entire “intersection” rather than individual “stations.” There is still no guarantee of profits from index type investing, but you have at least eliminated or managed some of the risks.
As investing has become more transparent and in a world where news, and fake news, spreads uncontrollably at times, I believe investing in individual companies today carries more risk than it once did. It can be profitable for the “chess players” who are confident in their decisions and willing to take more risks, but for most investors I believe an approach that allows ownership of entire “intersections” might make more sense.