There is a perception among some that investing in the stock market is similar to gambling. That arises because, like gambling, there are times when investing in the market you will win, and other times there will be losses. What some fail to realize is that the odds of winning are much greater for stocks compared to a casino.
There are basically two forms of gambling. One is through an intermediary, such as a casino, purchasing a lottery ticket, or going to a racetrack. The other is gambling among friends, such as a bet on a sporting event or playing cards.
Gambling through an intermediary results in losses for the vast majority of people. That is the casino cannot stay in business unless it covers its expenses and makes an appropriate return on investment. On any given day there will be some winners, but over time more will lose allowing the casino to be profitable.
When gambling among friends the winners and the losers cancel out, since there is no intermediary who obtains a portion of the proceeds. Someone who is especially skilled could make money over time betting among friends. However, the winner may no longer be allowed into the card game after a period of time, as the others get tired of losing.
When you are investing, whether it be stocks or real estate, you are being compensated for the risk you are undertaking. That is there is an expectation of a greater return by investing in stocks or real estate versus having your money in a savings account. When someone is gambling, there is no benefit for the risk that is being undertaken.
There are times when investing in the stock market can be like gambling. That is when one becomes a day trader, and is constantly turning over one’s investments. An example might be of someone buying stock in a company where a judge is going to rule on a major lawsuit the next day, and then selling the stock after the ruling. That would be a bet that could go either way.
Day traders like gamblers tend to lose money over time. On a very short-term basis you essentially have a 50 percent chance of being successful on a given trade. However, over time the continuous trading costs do add up, which tend to cause losses.
For those who keep their trading expenses and management fees relatively low there is a much greater likelihood of being successful with one’s investments. That is because most companies over time are profitable, and the stock market tends to grow with the overall economy.
The same logic would hold for real estate, where those who frequently buy and sell properties will tend to do worse versus someone who keeps their property for a long time. That is because transaction costs in real estate are very high. The exception being someone who has the ability to fix up a property at a relatively low cost, and sell for a higher price even after the transaction costs.
It is important to recognize with investing that losses can occur at certain times. That is why having a long-term perspective is critical for being successful.
Someone who wants to “gamble” with a small amount of their savings in the stock market has the wrong perspective. If someone wishes to gamble, that person should look at it as a form of entertainment. That money should be considered an expenditure not an investment.
The amount a person commits to the stock market should be based on one’s risk tolerance and time horizon. The longer one’s time horizon the greater the likelihood someone will be successful in the stock market. If someone has a very short-term time horizon they should not be invested in the market, because then it would be more like gambling.
