investing vs gambling

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.


2 Responses to investing vs gambling

  1. Paul Petillo says:

    Gamblers know that it is all about the nut. In its simplest terms, the nut refers to the amount of money needed to barely scrape by leaving them with a clear number of how much money they have to work with when they begin.

    Investors however believe that it is all or nothing. Which is too bad when you think about it. Once an investor gets a taste of that optimistic 110% return on their money, they begin the downward spiral of putting every available cent into the market. But if that equation changes and their return is 90% of what they put in, they panic.

    Graham, the legendary value investor was the first one to coin the term mad money. He suggested that this account, separate from all others (retirement accounts, emergency funds, etc.) would satisfy the urge to do something foolish. Once funded, this account would never be added to leaving the investor with the thrill and the loss all bracketed by a certain dollar figure.

    Most folks who walk into a casino know how much they can lose. What they never know, is how much they can make. Investors always approach their endeavor with the opposite in mind.

  2. […] I often hear investing compared with gambling. An interesting comparison between investing and gambling […]

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