Is the Stock Market Gambling?

Over the course of our illustrious careers as financial advisors, we have heard numerous folks say that the stock market is glorified gambling. Is there any truth to this idea? You could certainly say that the markets are unpredictable at times, but is it really gambling?

Last weekend, the eyes of the gambling world were focused on Churchill Downs and the timeless classic that is the Kentucky Derby. In a typical year more than $100 million is wagered on the super bowl of horse racing. If you go to the track and lay down a crisp $100 bill on the horse of your choice, there is a good chance that you are walking away from the track a hundred dollars lighter. Similar to most other forms of gambling, it boils down to a zero-sum game. Money is reallocated from losers’ pockets to winners’ pockets, and the house takes a cut. Nothing is being created. The same thing is true at the casino. If you place a bet, what do you own? Whether it’s at the horse track or in a game of blackjack the answer is the same. A chance. You own a statistical chance of winning money.

Let’s look at stock ownership as an alternative. If you buy a share of a corporation, what do you own? The answer is a bit more concrete. In the case of a stock, you have legal ownership of an entity that creates value in some way or another. That entity generates income (or at least attempts to) and presents growth opportunity based on earnings. The stock market serves as a place for buyers and sellers to come together and create a market for ownership in companies. Hardly a gamble. Are their risks involved? Absolutely. However averages are averages for a reason. Looking at the statistics should give you some comfort. Not convinced? Take a look at the odds if you will…

Over a one-year period the S&P 500 is positive about 75% of the time. Over a 5-year period that number is about 87%. In a 10-year period it is roughly 97% likely to be positive, and there’s not a rolling 20-year period out there with negative returns. Compare that to the best odds at the casino (blackjack) which is about 49%. Long-term investing in the markets may not be as exciting as a day at the track, but unlike gambling, the odds are in the investor’s favor.