MANY TIMES IN MY career, I’ve heard people say, “The stock market is just one big casino” or “Buying stocks is just like gambling.” Yes, there are similarities between investing and gambling. But when done properly, long-run investing shouldn’t resemble gambling in any real way.
Let’s start with the similarities. Day-traders—who buy individual stocks in an attempt to make a quick profit—are similar to gamblers at the roulette table. Both are hoping for a lucky play. If the day-traders are buying on margin, then the risk—and the similarity to gambling—only grows. I’ve read studies that day traders make money about 50% of the time. Want to guess what happens the other 50% of the time?
The chances of making money increase greatly when someone invests sensibly. To me, that means a couple of things. First, own a diversified mix of low-cost, tax-efficient index funds. Second, hold them through the inevitable ups and downs of the financial markets—ideally for decades.
In other words, you’re in a good position to make money as an investor by following a few well-known rules. Any casino that paid off for gamblers who followed a similarly simple strategy wouldn’t be around for very long.
Why, then, are investing and gambling so often compared? Well, in the short run, investing can seem like a gamble. You pick a few investments, pony up your hard-earned cash and hope for the best. If your investments go up, it’s because you’re smart. If your investments go down, then you’re unlucky.
Viewed in the short term, the market can deliver a lot of down days. Luck can seem to predominate. Only over the long term does the view improve. Over decades, the odds of gain are far greater in the financial markets than at the craps table.
You may be thinking, “But casinos and gambling are fun.” They even give you “free” drinks, meals and sometimes even rooms. As someone who has visited a casino once or twice—for research purposes only, of course—I totally agree with you.
If you only gamble what you can afford to lose, then casinos can be a blast. I would also argue that the steak dinners and playoffs tickets offered by stockbrokers are akin to the free drinks and rooms offered by the casino. Someone is paying for them—and it’s probably you.
HumbleDollar contributor Charley Ellis wrote in Winning the Loser’s Game that, “Investing is not entertainment—it’s a responsibility—and investing is not supposed to be ‘interesting.’ It’s a continuous process, like refining petroleum or manufacturing cookies, chemicals, or integrated circuits. If anything in the process is interesting, it’s wrong.”
Does that sound like a good time to you?
Bottom line: If your approach to investing feels like gambling, you’re probably doing it wrong.
Rob Carrigg, Jr., is a Certified Financial Planner in Portsmouth, New Hampshire. He is a problem solver who works to simplify people’s financial lives.
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