Is Stock Investing Akin to Gambling?


During a recent interview about my new book, The Compound Code: An Expert Guide to Trading Stocks & Options, I was once again confronted with a recurring question: Is stock investing akin to gambling?

To be sure, you will often hear investors refer to the stock market being rigged as a basis for not investing in equities. They are suggesting that stocks are somehow manipulated or controlled in a way that is going to cause you to lose money. If this were the case, then those who are ‘rigging’ the market are doing an exceedingly poor job. Often those same people are happy to head to Vegas where indeed the system is actually rigged to favor the house and puts the customer at a disadvantage.

Newsflash: to the extent the stock market is rigged, it is rigged in your favor. Let’s dig deeper. When it comes to blackjack, the casino has an approximately 2% edge which sounds very small but is enough for them to make huge profits (which you could also enjoy were you to make good investments in the right casino stocks – as in, be the house, not get your house taken from bad bets). For stock investing, if you want to think of the game as being rigged then you need to acknowledge, based on statistics, that it is massively rigged in your favor. Stocks go up on average about 4 out of 5 years, so if history holds true, 80% of the time you hold stocks for around 5 years, you will make money.

Not even the most rigged games in Vegas have those kinds of odds. Over 10-year periods (a relatively short holding period for anyone with a retirement account) the win ratio for the US stock market jumps to nearly 100% when factoring in dividends, while returns across these 10-year periods average around 9% annualized. Therefore, if the stock market game is rigged by some unseen hand on Wall Street intent on hurting the little guy investor, then they need to find another line of work because the net result of their so-called manipulation and dishonesty has led to one of the greatest wealth creation machines in history.

Of course, in any industry or large group of people you will always find a bad apple or two. But that does not mean the entire system is broken. For those who believe in such conspiracy theories to the point of choosing to keep money in cash (or potentially worse yet speculating their hard-earned retirement money on risky ventures rather than letting the power of stock market compounding work for them) they are potentially costing themselves a retirement they deserve and can attain through prudent financial planning and investing. It is true that most retail investors materially underperform the broad stock market, some studies indicating the average mutual fund investor earns less than half the market returns. However, it is important to note that is largely due their own behaviors: they try to time the market and end up buying high and selling low.

Remember, when it comes to vaccines, elections, or the stock market, simple emotionally-compelling falsehoods are easy to espouse as the culprit for someone’s given woes. It is easy to play the victim card and say it is the other guy’s fault for your state in life, especially if the other guy is some unnamed shadowy group allegedly hiding behind a curtain and pulling strings you can’t see. But the fact is that when it comes to stock investing, all the evidence of the positive power of the markets is right in front of you. The returns prudent and patient investors can attain are right there for anyone to see.

And rather than focusing on some aberrational (and often not fact-based) hype about what is behind a given day’s market decline, focus instead on fundamentals like how many stores SBUX is opening daily and how popular their latest beverage offerings are. When I go into my local SBUX each morning and see drink after drink lined up for eager, happy customers, that gives me solace about this company as an investment, no matter how much alarmists ring the bell about some dark hand behind the scenes rigging the market.

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