Is investing like gambling in Vegas?
I get this question a lot, and I can understand why. From an outsider’s perspective, someone not in the financial or investment industry, I can only imagine how ridiculous it must look.
I remember watching the movie “Trading Places” when I was a kid. It’s the film where Eddie Murphy plays a homeless hustler and gets the opportunity to be a commodity investment trader overnight. Come to think of it, that was a hard R-rated movie and it came out when I was, like, ten. What’s up with that, Mom? So much for parental supervision. When you’re the youngest of five kids, parental and supervision were two words I had no concept of as a child. And for that, I thank you, Mother!
Anyway, back to the film filled with profanity, drugs, nudity, and prostitution. I remember Eddie was trading orange juice futures contracts and it all seemed so absurd. Prices would go up, down, and all over. There was no rhyme or reason, it seemed. It was all luck. It looked like it was one big roll of the dice.
And this may be how you think of investing. If you watch CNBC or Fox Business, or read some of the financial websites, it can all seem so arbitrary. Again, like you are in Vegas playing roulette: spin the ball and hope for the best.
In some ways, that’s a pretty good description of the stock market, but only in the short-term. What the market does day-to-day or even week-to-week is anyone’s guess and gamble. Red? Black? Market going up? Down? It’s all about the same. When I was explaining this to a client once, she said, “What’s the point then? At least in Vegas I get free drinks!”
But fear not. Although the day-to-day movement of the stock market or a particular stock is just about as predictable as a slot machine, over longer periods, investing has almost nothing to do with luck and everything to do with skill and patience.
Let’s go back to our roulette example. When you put your chips on 33, you have no edge. Where the little white ball ultimately lands is purely luck. You get lucky and win big, or you don’t and lose everything.
Now compare that to investing. Instead of putting your chips on number 33, you put your money into a stock like Apple. What does that mean, though? It means you are buying a piece of Apple, the company. It means you own a little bit of the company. You have ownership in a company that makes products and sells them all over the world. You have ownership in a company that earns billions of dollars a year and employs 100,000 people who are researching and designing new products they can sell. You have ownership in a business that may continue to make money and grow. As an owner, you benefit from every iPhone they sell. It’s no different than if you had your own company you owned by yourself. Every sale you made and all the profit would benefit you. However, since you don’t own 100% of Apple, you share in the success of the company with everyone else who owns Apple stock.
Now compare this to the roulette ball and hoping it lands on your number. Vegas can be a blast. I’ve never been much of a gambler, but I understand the momentary thrill of anticipation of hitting 21 or busting. But investing is not gambling. Vegas requires luck, whereas investing requires skill and patience.
In Vegas, you are betting on a ball, a die, or a card. As an investor, you are betting on products, people, and future profits. And if you do well, you can afford to buy your own drinks!
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.