Investing, Done Correctly, is not Gambling

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Is investing in the stock market akin to gambling? It certainly carries a reasonable amount of risk. Yet, done correctly, investing in the market is not remotely gambling.

For comparison, consider games of chance. The best one to play is Blackjack. If you play every hand statistically correctly, the odds of winning over a long period of play are 0%, but you will lose less money than with other games. In Blackjack, for every $100 you bet, you will lose just $1 to $2 – and that’s if you play each hand perfectly, which you won’t. Other games of chance have considerably worse odds than Blackjack. Keno and slot machines lead the pack, with a 100% chance of losing up to $50 for every $100 bet over time. Games of chance might qualify as “investing” only if you own a casino (and are the “house”).

That’s quite different from the stock market, where the chance of a positive return over a long period of time, say 10 years, is over 94%. Put another way, the chance of losing in the long term is just 6%, versus 100% with gambling. For every $100 put into the stock market, there is a 94% chance you will gain an additional $96 after 10 years (an annual return of 7%), and I am being conservative. Past performance indicates the annual return for U.S. stocks has ranged from 9% to 14% over the past 10 to 30 years.

The crucial phrase in the opening paragraph above is “done correctly,” which essentially means investing rather than speculating. Speculating (gambling) has a short-term horizon and is typically fast-moving and full of adrenaline and excitement. Investing done correctly, on the other hand, has a long-term view and is very slow moving and boring.