Recently a new client offered the suggestion that investing is just glorified gambling. I thought it was an interesting perspective and with the recent market volatility I wanted to share my thoughts on the subject.
There are some very big differences between gambling and investing. One can certainly see the excess on Wall Street and draw the conclusion that, like casinos Wall Street is stacked against them. Some investors believe that Wall Street only wins when they lose. The reality is wall street firms do best when their clients make money. Unlike gambling, investing is not a zero-sum game.
Immediacy of the Payoff
The nightly news tends to focus on today’s activity in the market, emphasizing the short-term market volatility. News needs to be “sensational” so only the largest surprise swings get coverage. Consumers attention get drawn in by negative news stories (and there is evidence to support this in the book Behavioral Finance). If the market is negative, the headlines are doom and gloom. If the market is positive the headlines might be optimistic about the future, but they usually just say the market was up ‘X’ points today. Headlines serve to deliver an emotional response and engage viewers. There is a saying in TV news: “If it bleeds, it leads.”
Investors tend to remember traumatic market events not so much by what happened but how the event made them feel. And that’s the key phrase: “How it made me feel”.
Back the Casino
Casinos attract gamblers and non-gamblers alike by creating a highly emotional and exciting atmosphere. The lights, sounds and shows all serve to draw people in. Casinos make someone believe a small bet can win big.
Casinos are masters at helping patrons ‘see it’ and ‘dream it’. People see billboard announcing a $400 million jackpot and their minds almost instantly jump to thoughts of how they would use the money. The casino experience entice people to live in the ‘here-and-now’ with virtually no commitment. Dreaming it can be fun.
There are only two outcomes when in making a casino bet, either the gambler wins or the casino wins – it is a zero-sum game. I find it fascinating that gamblers continue to place bets with full knowledge the odds are stacked against them. In 2016 global land-based casinos had a gross win of over $480 billion.* Casinos help gamblers forget those losses with free drinks and buffets…I guess comfort food makes everyone feel a little better. Casinos are masters at keeping the dream alive and keeping gamblers at the tables.
Investing is a commitment
When it comes to investing, it is and should be relatively boring. There is almost no excitement in the idea that ‘some-day’ we get to stop working and live the same standard of life.” Really, who gets all fired up about that? (Admittedly, I do, but most people don’t). Let’s face facts, getting to live the same standard of life without working is hardly the stuff of dreams.
Investing is hard because it takes time, requires commitment and discipline. There is rarely instant gratification with investing. To build wealth through investing, it requires a systematic, periodic investments over a lifetime. Investors make progress towards their goals through programs that are formulaic in their approach. Employer retirement plans and monthly auto-investment programs are great examples. Unfortunately, there aren’t any lights, sounds or shows to make it fun or keep us in the market.
Markets cycles can be dramatic. The 2008 housing market crash (one of the worst crashes in history) still looms large in many people’s memory as does September 2001. Large market declines trigger similar emotional responses gamblers get when they are losing, which is to take the money off the table. Given the odds, choosing to not gambling is always the right call and choosing to not invest in a diversified portfolio is always the wrong call.
Market declines can create tremendous opportunities. If you invested in the S&P 500 index on January 1, 2008 thru December 31, 2017 you would have achieved an 82.08% return. However, during the first two months of 2008 you would have lost almost 50% of your initial investment.** Investors that took their money out of the market or waited too long before investing again and they missed the opportunity.
A successful investor
Successful investors should be concerned with disciplined process and systematic implementation of the process, regardless of market conditions. They should remain focused on the long-term averages, not the daily headlines.
Both gambling and investing involve the risk of capital. However, gamblers don’t get to remove a bet after it is placed. Investors can remove money, take profits and shift assets into other areas of the global markets when they see opportunity.
There are two huge distinctions between gambling and investing. One, investing is not a zero-sum game. Two, long term market statistics and performance show the odds in your favor.
Investing is a life-long endeavor, not entertainment.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or Herr Capital Management, LLC and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.