First off, my disclaimer: I’m just some idiot random guy on the interwebs. None of anything on this blog, including what follows, is advice on what you should do. Just some entertainment random musings that you can take for what they’re worth which isn’t much.
Do ya’ feel lucky? Well do ya’, punk?
I’ve read and heard lots of people who scream contend that investing—certainly in the stock market—is nothing short of a wild gamble. Sure, they claim, you might win. Maybe even bigly. But for anyone other than the likes of Warren Buffett, whether you win or lose is almost entirely luck. Pure and simple.
Go ahead and chance things by picking a stock, chump, these folks say. But, they add, don’t be surprised when if you lose some or all of the invested monies.
Now, I’ve never thought investing to be unadulterated gambling. But for far too long, I thought the way to “win” in equity investing was to do lotsa research. And maybe to know a guy (short of insider trading, of course). And, yes, sure, not just a little luck.
I invested in an individual stock just once . . . and in short order was duly scared off from investing in any individual companies forever a long time. My subsequent investments all were in funds within my employers’ retirement plans.
Sadly, for far too long, I didn’t know how to properly evaluate those plans. I’m sure my investments underperformed broad index funds. Worse, I’m sure I generously padded many fund managers’ pockets by paying far too much in fees.
This all said, as most of my investing years coincided with the epic bull run following the Great Financial Crisis, my investments grew. And at a rate exceeding inflation.
Tennis rights
I recently thought of the investing-is-gambling argument after reading the blog post “Roger Federer vs. the Stock Market.” on Ben Carlson’s most excellent A Wealth of Common Sense blog. In the post, Carlson references a recent college commencement speech given by Roger Federer, one of the best tennis players ever. Some might even argue the best player ever.
In the speech, Federer explains that while he won approximately 80% of the matches he played over his long career, he won only 54% of the actual points in those matches. Carlson wrote that Federer’s remark reminded him of the stock market, explaining,
“[o]n a daily basis over the past 100 years or so, the S&P 500 has been flat or up roughly 54% of the time, just like Federer: Shockingly, the average down day is a little worse than the average up day is good. Despite an average daily return of just three basis points, the stock market’s compounding over longer time horizons has been breathtaking. These daily numbers are price-only (meaning no dividends). On a price-only basis, the S&P 500 is up close to 39,000% since 1927. The average dividend yield in that time was just shy of 3.7%. With dividends reinvested, the total return since 1927 jumps to a staggering 1.3 million percent.”
Pretty pictures
One of the first things I learned about when I discovered FIRE was index funds, and their average returns over time. Total market and S&P 500 index funds being most prominent of those recommended in the FIRE community.
Graphs illustrating the points about these funds painted, for me, a crystal clear and compelling picture: shortish(ish)-term volatility notwithstanding, over the course of decades and longer, the U.S. stock market goes up and to the right. Not vertical, but at a nice angle. Give or take, 10% annually, and roughly 7% annually after taking average inflation into account.
I quickly went googly-eyed for these funds. Their low expense ratios made me swoon all the more.
Now, again, I’m just some idiot random internet guy popping off some thoughts. Don’t consider anything in this post to be advice. And yadda, yadda, yadda and all that. But those 7%/10% average annual gains, while not crazy high, are nothing to sneeze at. I mean, compounded over time—ideally decades—they can produce the amazing results that Carlson related in his post.
Wanna bet? Yes!
Carlson thought of the stock market and compounding when he heard Federer’s speech. I thought of casinos when I read Carlson’s blog post.
Casinos essentially are money-printing machines . . . for their owners. That’s because the casino has the edge in all the games of chance that it offers.
Some games, the casino has a tiny edge—less than 1%. Others, far higher—25-40% my cursory interwebs research tells me. Averaging all types of casino games, and assuming a not-out-of-the-ordinary number and type of customer, I’m thinking the aggregate odds probably aren’t too far off of a 7-10% range in favor of the casino.
I like those odds in gambling. I like those odds/returns in investing. Oh, yes I do, Sam I am.
So, if investing is gambling as some contend, but I can in effect be the casino by investing in all the stocks (or the S&P 500, for example), I’m gonna take those 7%/10% returns. Every. Darn. Day.
Or, should I say, every decade after decade.
And, yes, it’s certainly possible for a casino to lose money over any length of time. And for a broad index to go down over a decade or more. The phrase “past performance is not indicative of future results” isn’t lost on me. It shouldn’t be lost on you either.
But to your humble idiot blogger and resident history buff, it seems to me the odds are with the patient, long-term investor. I mean, those graphs! Which are based on objective history!
Merriam-Webster defines “gambling” as: “the practice or activity of betting : the practice of risking money or other stakes in a game or bet.”
But here’s the thing. In the casino, every time a game is played, the customer and the casino are both making a bet and risking money. The customer is betting/risking the money he or she is putting up. The casino is risking a payout, whether by way of money spilling from a slot machine, making good on a ball landing in a slot, or surrendering monies to a customer having the highest hand in a card game. It’s just that the aggregate odds aren’t 50/50. They’re skewed in the casino’s favor.
Which makes all the difference.
No one knows how a total market or S&P 500 index fund will perform over time, whether short-, medium-, or long-term. No one. So, when an investor plunks down some dough in them, he or she is risking money. In what I guess could be called a “game” or “bet.”
But I think it’s a mistake to think of the investor as the customer gambler. No, I think he or she is the casino.
Which makes all the difference.
And in the end . . .
Like I mentioned, I did make healthier contributions to fund managers’ wallets than—I painfully came to realize—I’d have liked. Thankfully, however, I never contributed anything to a financial advisor with no fiduciary responsibility to me. Because we never hired such a person, even if we came close a few times. That was mostly because of cheapness and dumb luck. Good thing, too. Those folks not only can take a healthy chunk of your monies, but offer . . . uuummm . . . questionable advice and conflicts of interests.
