I have heard the criticism from some that, “investing in the market is no different than going to the casino!”. Their contention is that putting money into the ever volatile, ever unpredictable market is akin to a roll of the dice or a spin of the roulette wheel. I have long pushed back against this notion that stock market investing is the same as gambling. However, recent conversations that I have had with investors, along with some very strange stories in the news, have led me to rethink my position, albeit with a caveat. I believe that there has always been a difference between “investing” and “trading”, the latter of which has been in the limelight recently for all of the wrong reasons (which I will get to in a moment). Suffice to say that when it comes to buying and selling in the stock market, the “trading” crowd could, more often than not, be rightly accused of gambling by the aforementioned critics. However, before we go further, let’s take a moment to discuss what I see as the difference between “investing” and “trading”.
Throughout history, humanity has been in the business of investing their assets in the hopes of future gain. Historically, those investments were often made in physical assets such as land or precious metals. Additionally, many “invest” their time, energy, and capital in businesses, careers, and other ventures. As time went on, those with means to do so saw the success of those who had invested their own wealth and labor and found ways to buy into their successes. Essentially, investing in their investments. The uber popular pitch meeting show, “Shark Tank”, is a perfect example of this. What all of these investments have in common is that the “investor” is not so far removed from the “investment” that they do not have a good understanding of the inner workings of the investment. Take the small business owner, for example, who has poured their blood, sweat, and tears into their business. They know exactly how much energy and effort they have needed to expel in order to make the business successful. Likewise, think of Kevin O’Leary aka Mr. Wonderful from Shark Tank. He may not have been the one who built the businesses that he invests in, but he is intimately involved in making sure that they succeed and that he receives a hefty return.
I am not an economist or a historian but I would have to imagine that somewhere around the year 1817 and the formal creation of the New York Stock Exchange is when things began to change dramatically. The introduction of the stock exchange now made it possible to buy and sell small (or large) percentages of companies that the buyer or seller would likely never have any direct involvement in. Thus, a new type of investor was born, one whose investment is strictly financial and based on the investor’s knowledge of the underlying company they are invested in and the industry in which it is involved. Over time, it became clear that not everyone was cut out to select companies in which to invest. This left many people out of this new class of investors, and by extension, the opportunity to accumulate wealth by means of the market.
In 1924, the first modern mutual fund was launched in the United States followed by the first exchange traded funds (ETF) around the time of the Great Recession (2007-2009)[i]. I wrote about the difference between the two here[ii]. These funds hired professional money managers to pick and choose companies in which to invest the fund’s money. The funds then allowed others to buy shares of their fund and participate in the profits. Again, a new class of investors was born as investing in the stock market became accessible to nearly everyone by way of these new funds. Now, the vast majority of individual investors utilize mutual funds or ETFs in order to participate in the gains of the market.
My point in explaining all of this is that it is perfectly reasonable for someone to invest their money in the stock market without being accused of gambling. Many well-respected fund companies and money managers have long track records of success and incredibly intelligent individuals behind them. Utilizing their knowledge and expertise is no more gambling than it would be to hire any other professional for a job that you are unqualified to perform. The individual who does their research (or seeks the help of a financial advisor) and invests their hard earned money in a reputable fund in the hopes of long-term growth, is not a “gambler” they are an “investor”. Additionally, if you are one of the few in our society who does have the wherewithal to conduct your own financial analysis and evaluation, it could very well be that picking and choosing companies to invest in on your own is no more gambling than investing in a fund. The key here is knowing your limits and ability which is what leads me into my next point.
As I mentioned previously, the majority of individual investing is done by use of mutual funds and ETFs. There is however, a rising number of people who are choosing to trade stocks on their own, often with the use of smartphone apps (I have written about this in the past here, here, and here). The problem with this is that the vast majority of those people have very little understanding of what the stock market is, how it works, and how to make prudent investments. These are the people that I would refer to as “traders” not “investors”. The price of being a “trader” can be very costly even if you consider yourself to be very knowledgeable when it comes to investing. This isn’t meant to be a slight to anyone’s intelligence or a wholesale denouncement of trading in general. It is just very difficult to buy and sell individual stocks on your own and eke out a positive return in the long term. Even some of the world’s top professional traders, like Warren Buffet, fail from time to time. It can also be very easy to fall prey to the latest online investing fad and derail your finances that way. A great example of this is what happened back in January with the so-called “meme stocks”.
So what am I trying to say with all of this? My point is that investing, in and of itself, should by no means be considered gambling. There are plenty of prudent options for an individual or family to grow long-term wealth that your financial advisor can help you to choose from. Not to mention the historical precedent of investing throughout history! However, trading in the sense that I described above, is and should be considered gambling. I would go so far as to say that it has no place in a prudent financial plan. If you want to take a small amount of cash to throw at the latest “meme stock” or cryptocurrency, then fair enough. Just make sure that the bulk of your finances are in your “investment” account not your “trading” account.
Now comes everyone’s favorite part of their week: The “A Wing and a Plan” weekly song! It’s December, which means that Christmas songs are officially allowable. Here is one of my favorite renditions of a Christmas classic. Enjoy!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.