Over the past few decades, more than once have I heard comments that allude that investing in the stock market is akin to gambling… a game of chance per se. Needless to say, this comes from a lack of understanding, but nonetheless, it is a thought that occupies space in many people’s minds. (Read more: Stock ownership does mean something)
I hear this enough that it spurred a thought of my own… What if stock investing was truly just another game of chance you find on the casino floor? Where would it rank amongst the other games, would it be popular, etc.? So, in light of the most gambled-upon event just ending, the Super Bowl, there is no better time to put some real analysis behind this…
Whether you are placing a wager at a blackjack table or investing in an S&P 500 Index fund, there are historical statistics to each that portend the probability of winning. With casino games, yes, you can spend a weekend in Sin City and walk away a big winner… but over time (months, even years), you most likely will land at the averages. Which, unfortunately, are worse than the weekend binge!
The same goes for investing in the stock market… but inversely. The longer you participate, the better the odds of winning. In fact, stay invested long enough, and it is a near certainty you will experience positive returns.
Over time, not accounting for the value of the complimentary cocktails, Craps is the only casino game where you have a 50/50 chance of walking away with the money you arrived at in Las Vegas. On the other hand, keeping your money invested in an S&P 500 Index fund for one year yields a 75%+ chance of increasing the size of your pocketbook. Put another way; there is a 75% chance your investment will increase in value in any given year. Another way is if you stay invested for four years, three of those years will have positive returns. I like those odds… but it gets even better!
Keep your money invested for 10+ years, and there is a 95% - 100% chance that your money will grow! Hence, this is why any reputable investment advisor will tell you to only invest in the stock market if you have at least 5 – 10 years to keep your money invested. Sounds like a great trade-off to me. In return for your time, you will be rewarded with more money!
Investing is not gambling. As an investor, the odds are stacked in your favor. Imagine if, on average, you won at least 75% of the time when you went to Las Vegas. Well, there wouldn’t be a Las Vegas for very long.
That adult Disneyland exists because the odds are 50/50 or slightly better for the casinos. The near-even odds allow the casinos to make some money and provide an extraordinary experience while at the same time giving its customers (gamblers) a winning opportunity. While it may not seem like it when you leave town on the wrong side, it is the proverbial win/win.
On the other hand, long-term investors win… if you are willing to stay in the casino, I mean the stock market. As history tells us, the longer you stay, the better the odds of positive returns. And of course, we should always learn from history!
Note: Nothing in this letter should be considered investment advice, research,
or an invitation to buy or sell any securities.