A certain element of the public and media has always unfairly equated the stock market with gambling or casinos. This mindset likely stems from those who have misconceptions about the stock market, traders who had a big loss after pursuing a hot stock tip or from casual observers who feel this way because of the types of narratives the media presents around the stock market.
In some cases, the media portrays stock market winners like someone who just got lucky on a roulette wheel. In other cases, the media interviews people who lost money in the latest fad — cementing the impression to casual observers that the stock market is rigged against them like a casino.
The sense that buying stocks is just a game and the stock market is a casino seems to have been amplified lately with all of the social media and news attention around the massive stock price swings in GameStop, free stock trading on phone apps, stock tips on TikTok and the ongoing attention to Bitcoin (see our take on Bitcoin here).
Of course, there have been some people who got rich in Bitcoin, the GameStop price surge or the latest fad, but it’s much more likely that the average retail investor who dabbles in stock trading has lost money and is left feeling like the system is rigged against them. The very fact that some people do get rich quickly largely through luck (like a casino) is what draws media attention to these situations in the first place. This then plays on our natural greed and fear of missing out on fast, big returns. “If they are getting rich, so should I!”
Why the stock market is NOT like a casino
The reality is that the odds of being a successful investor earning positive returns in the stock market are very high. Comparing the stock market to casinos is like comparing an apple to an aardvark — they are entirely different.
You can be a big winner in the stock market by literally doing nothing. Since 1926, the S&P 500 Index has been positive roughly 75% of calendar years; only about 25% of those years have produced a loss.
As the chart below reflects, the longer one stays invested in the market, the higher probability of positive returns. Holding the market for as little as five years produces an 88% probability of positive performance, and every 20-year period has provided a 100% probability of positive returns. Those are fantastic odds of success compared to a casino where the odds for every game are stacked against you!
It’s all about time in the market, not timing
One critical lesson here is that it is the time in the market that is the key to success, not timing the market. If one wants the thrills of a casino, holding stocks long term probably won’t provide the same dopamine rush as gambling. However, if one wants to significantly increase the probability of positive returns, history shows that the longer one stays in the market, the higher probability of success. This is true because by owning stocks, you own shares in real companies whose goal is to generate cash flow and wealth over time. This is the opposite of a casino, where you are primarily hoping for luck, and the odds are worse the longer you play.
Keep in mind that since 1928, U.S. stocks have produced an average annual return of about 10%.1 So not only do you have relatively high probabilities of success over time, but also the rate of return has been significant. Of course, investors must also accept the roughly 25% of calendar-year declines as a normal aspect of the way stock markets work — as painful as those times may be.
Pursuing long-term success over short-term fads
Another critical lesson is to ignore the media hype over the latest fad or company with a soaring stock price. There will always be a few people who get lucky and get rich quick, but evidence shows that the vast majority of day traders lose money.2 The conclusion of a recent study: “Large increases in Robinhood users [a free trading app] are often accompanied by large price spikes [in a stock] and are followed by reliably negative returns.” Translation: traders pile into a stock going up in price, which is followed by the traders losing money when the price invariably goes back down.
Investing is not gambling. It’s not a game where we hope to get lucky with a lottery ticket. It’s about owning shares in companies around the world whose goal is to generate cash flow and wealth over time. Investing is a process for the long term. One with discipline and patience that is highly correlated with positive outcomes over time.