Is the stock market the biggest casino in the world?

Some “investors” buy shares just because their prices have been rising feverishly for a while or because your buddy had relayed a stock tip from his trusted broker friend or analyst report that there will be some movements in this particular stock. I have to admit I have speculated/gambled/betted/whatever the F*** it is in the past when I just started out in the market. We all know this method did not and will not turn up well. Thankfully, I'm on the right track now and all losses (minimal) have been covered! Yay!

 

The Difference

 

Casino games are designed to have a negative expected return. If you play games in a casino, then over time you should be expected to lose money. This is because the casino has set the odds so that you will lose money more often than you will make it. You are a customer paying them to experience risk.

The stock market as a whole should have a positive expected value. If you passively hold onto a broad market index of stocks, you should make money over time. This is why the stock market exists- to give investors a positive return in exchange for taking on risk.This is in contrast to the casinos.

Both are zero sum (someone has to lose for someone else to win). The fact that both of these institutions exist is kind of interesting. The stock market (like insurance) functions because people are, by and large, risk averse. Casinos function because, every now and then, people actually want to pay money (by losing it) so that they can experience risk or the thrill. Like how people are more prone to gamble during the Lunar New Year or special occasions – especially the Chinese (Isnt that why their stock markets are reaching a frothy level not seen before?)

Instead of gambling, you can increase your chances of success by focusing on the business fundamentals of a share. After all, that’s how superinvestors like Warren Buffett and Walter Schloss made their fortunes in their investing careers – they had looked at their investments through the eyes of a business owner.

By thoroughly researching a business and buying only when its intrinsic value is higher than its share price, you tilt the odds of success in your favour. No one can guarantee that an investment will make money. But when the odds are advantageous for you compared to a casino where the odds are always in the house’s favour.

Conclusion

The stock market is here to serve us and not to instruct us. It is not a casino in which we can make a fortune overnight and hence for speculators or gamblers, a trip to the casinos could satisfy their adrenaline rush and lower odds of huge returns. Good luck on that!