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THE BLOG

Are You Investing, or Gambling?

Respectfully, if you believe the stock market is like gambling, you are not playing the game right. When investing long term in the stock market, your odds, in fact, are better and higher than the odds of the casino itself.
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On a number of occasions, I have sat with fearful investors that claim that the stock market is just like gambling. They explain how they started with a large sum of money, and traded until their money disintegrated into nothing. Respectfully, if you believe the stock market is like gambling, you are not playing the game right. When investing long term in the stock market, your odds, in fact, are better and higher than the odds of the casino itself.

When it comes to the casino, the odds are that the more time you spend playing, the greater the chance that you will lose money. This is because in every single game, the house has the advantage, or the "house edge." In some games, the "house edge" is larger than others. For example, black jack has one of the lowest disadvantages for the gambler, at a rate of .5%, assuming that the players "play by the book." If the gambler is unskilled and does not consistently "play by the book", the disadvantage increases to about 2%. In a game like roulette, the house edge is 5.5%.

As a player in a casino, the odds are simply not in your favor. It is no coincidence that casinos are built like a labyrinth with no easy access to an exit, windows, or a clock. Free drinks and comped rooms are the most common tools that casinos use to get gamblers through the doors and staying in there.

For an investor however, the longer you are invested, the better. The stock market on average has annualized 9.5% per year. In the case of an investor, the "house edge" is in your favor, which means that the longer you are invested, the higher your chances of growing your money. It is actually the reverse of playing in a casino. Your odds are even better than the house.

Another big difference between gambling and investing, is that in gambling, there is a winner and a loser, but in investing, the investor and the company are on the same team. Casinos are built to win, and for players to lose. Everything that they do is for the purpose of getting more gamblers through the door, for longer periods of time, and gambling more money. The more money players lose; the more money the house makes.

No one ever comped anything to convince me to to buy Apple stock, but the money I have made invested in Apple over the years far outweighs the cost of a Las Vegas hotel room. This is because when you are an investor, you are part of a team. If the company that you are invested in makes money, the investor makes money. The decisions that the company makes are supposed to be in the best interest of both the company, and its investors. The interests are aligned, which is exactly the opposite in a casino. I am willing to bet that few gamblers have received enough free drinks and comped rooms to exceed their casino losses.

One good casino or one bad short term stock trade tricks people into believing that their chances In Las Vegas are just as good as their chances when investing. Statistically, this is just not true. If you believe this, it is because you are not investing the right way. Day trading, attempting to buy low and sell high, or emotionally obsessing over your portfolio will leave you with odds that are as bad or worse than gambling. The best, most reliable way to invest is to set it and forget it. Hire someone that you trust, and that believes in long term investing to manage your investments.

Go to Vegas for the parties, the food, and the people, but don't go in anticipation of making it big. Of course, anything is possible, but I wouldn't trust your future in the hands of a casino.

Disclaimer:

This article is provided for informational and educational purposes only and contains information that is not suitable for everyone. As such nothing herein should be construed as the provision of personalized investment advice. There is no guarantee that the views and opinions expressed in this article will come to pass. Additionally, this article contains information derived from third party sources. Although we believe these third party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore. This article should not be regarded as a complete analysis of the subjects discussed. All information and expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice.