One of the things that frustrates me to no end are people who comment on articles without having some kind of knowledge of the subject at hand. They discuss nothing but conspiracy theories or believe that the world is out to get them or that things couldn’t be possibly true when they are. The worst kind of comments are those who engage in personal insults by talking about someone’s race, religion, ethnicity, gender, sexual orientation, class or the like. Unfortunately, the internet makes these types of comments all too common.
I find this to be just as true when it comes to investing and personal finance. So many people, including many of my students, don’t engage in discussions of money for a number of reasons. One of the common refrains I see in comments and from colleagues of mine is that investing in the stock market is nothing but a casino. It is a casino where I could lose all of my money. As a result, people would rather put their money under their mattress or even justify spending it on stuff they don’t need like a car or something. The argument being that at least they can have some fun or get some use out of that money, even if the stuff they buy goes down in value.
At some level I can certainly understand that mentality. I mean the 2000s are often referred to as the lost decade of investing because the stock market basically went sideways. Even worst is the Great Recession of 2007-09 which caused people to lose 1/2 of their savings (including me). Small investors got so scared that they sold everything and didn’t buy back in. Of course if you had stayed in you would have not only gained everything back, but it would’ve returned an additional 50%.
Despite my understanding of this mentality I still can’t understand the analogy that investing is like putting your money in casino. Here are just some thoughts on that analogy.
First, stock market investing does come with risk. I think some people who invest in the market learned about the lore of the 80s and 90s and thought stocks would just go up forever. Then when there is a rough patch and they lose money they think it is gambling and a casino. Those who invest don’t understand that there is risk and you could possibly lose money. However, that loss is typically short-term in nature. Over the 140 year history of the stock market positive years have been double the negative years.
Nothing ever goes up, up, up, and up.
Look at the housing market. I mean many homes lost value where most Americans thought their home values would go up forever. Not understanding that investing comes with some risk doesn’t make it a casino.
Second, risk is a part of life. I wish everything could be certain life. I wish we could all get a guaranteed salary and have a basic safety net for everything and in some respects we do, but there is risk in every aspect of our lives. Except for your home that specific possession (car, diamond ring, clothes, etc.) will go down in value. You take a risk when you buy those things. You might crash your car, lose your jewelry, stain your clothes, yet we still do it. I certainly understand that. I mean those things are tangible. You can touch them, use them, taste them, etc. But it still involves risk. We just don’t think of it in those terms.
Third, people don’t understand what investing is. I think another reason that people think the market is a casino is because they might not understand the basics of investing. When a company issues stock that stock is a piece of OWNERSHIP of that company.When I buy a mutual fund I am buying a basket of companies (e.g. Google, Facebook, Amazon, IBM, General Mills, etc) where I actually own part of the company. So in my portfolio I own some of the biggest companies in the world. Now I may not own a lot of shares, but I still own them. And I seriously don’t think that Google, Apple, Amazon, and other companies are going out of business tomorrow. In fact, I think they are going to do better. They are going to grow.
When people say the stock market is a casino I don’t think they realize that they are buying a piece of that company. Most would say that those companies aren’t going out of business. Those companies are pretty stable. They are tangible items. Unlike a casino where there are no assets that are tangible the stock market is based upon specific assets. Now there are certainly bets made against certain companies (e.g. the movie the Big Short….go see it) or certain industries, but I don’t play with that stuff. That is snake oil. When I put money into the stock market I am buying the best and brightest of American companies. Considering I don’t think the world is going to zero I am pretty confident that my money is generally safe.
Fourth, people are extremely short-sighted. There is a lot of speculation out there about interest rates, the current state of the economy and the like. And I know that can cause a lot of consternation. But I think we lose a little perspective, including myself, when we start hemming and hawing about the state of the world. The U.S. stock market has existed for over 140 years. Over that time period it has averaged almost 11% per year. There have been double the number of good years vs. bad. So when people start talking about our current problems I think we lose some perspective.
I mean do people think that this is the worst time in human history? That Americans and the world didn’t face problems in the past with war, famine, etc. You don’t think that people have dealt with bad things before? And what happened? We got through it, moved on, and continued to progress.
Now I am not saying that progress is constantly upward, but I am so sick and tired of the notion that this time is different for stocks and the global economy.
This time is different.
Maybe it is. But for 140 years we have been on an upswing over the long-term. Now all of a sudden things are going to pot and we have a casino. Really? Are we that short-sighted? Lack of historical precedent? C’mon people get some perspective. If you are in it for the long haul, like I am, then you have to sit back and trust things a little bit more.
Finally, we just want the easy way out. I think one of the final reasons that a lot of people think of investing as gambling and/or the stock market is a casino is that we want an easy explanation. If it is a casino then we know you are more than likely to lose your money. And if I lose my money we are proven right. We don’t want to consider alternative explanations like maybe things can’t always go up or that there are external factors involved or we have to look in the mirror and say it was my fault. I screwed up by buying the wrong investment or whatever. We want an easy reason to make us feel better about losing money because that means we don’t have to examine our own perspectives or lack of knowledge.
The problem with that mentality is that there is no easy way out. There is no black and white solution. It is an argumentative fallacy. The world is gray. The world is complex. Investing isn’t as simple as I put my money in and it automatically goes up. Over time I would say that is generally correct, but not all of the time and not in all ways. We don’t get that nice linear progression that I know we would love to have. Without it we would rather do nothing, let grass grow under us and wait until our prediction is correct. A broken clock is right twice per day, but it is still a broken clock. A person who believes that investing is gambling is a broken clock.
The Bottom Line: I get that a lot of people are afraid of the stock market because of what happened in 2007-09. And it is easier to do nothing, put your money in the bank, and be a broken clock for the rest of your life. But there were no guarantees for investing. Investing isn’t like the Hunger Games (may the odds ever be in your favor). Investing is a calculated risk, but it still comes with risk. If people want to stay out and think it is a casino fine with me. I will take the odds of the stock market house any day of the week, which is a 140 year track record of an average gain of 11% per year over that time period and my ability to own some of the biggest and best companies in the world. If that is your idea of gambling then sign me up because I will take that bet every time.