Investing is often compared to gambling. Many people who would never set foot in a casino for fear of losing all their money, won’t invest in the stock market for the same reason. Other people treat their investing like a trip to the casino. That is, they just pick random stocks, with nothing more than a hope that they’ll do well. Is it fair to compare investing and gambling? There are certainly a number of similarities.
In both, you can make a lot of money or lose a lot of money. In both, you can make a lot or lose a lot in a single play. Victories in both will cause your heart to race. Losses in both can cause depression. The difference is in the odds.
At the casino, the one-armed bandits are rigged to return to you, on average, 98% of what you put in. On any one play you might win big or lose big, but if you play long enough, you’ll find that you lose about 2% on average. This is how the casino makes money. They’re providing “entertainment” for the low, low cost of 2%.
The stock market exists for a different reason. It is simply a market where shares of company ownership are traded. It returns to you, on average, 110% of what you put in. On any one play you might strike it rich or lose your shirt, but if you’re in the market long enough, you’ll find that you gain about 10% on average.
So is the stock market like a casino? Sure. A casino where the odds are stacked in your favor! So be careful. By all means, make wise investing decisions. But there’s no need to fear the market. It’s not there to soak you.
This post originally appeared in the April 2, 2008, edition of the Greenhorn Valley View.