Q. I want to eventually retire with a healthy nest egg for me and my family. My accountant says I should invest in the stock market, but that sounds risky. Isn’t Wall Street just a giant casino?
Explore This IssueACEP Now: Vol 40 – No 04 – April 2021
A. Given all of the market gyrations and shenanigans that have occurred on Wall Street and Main Street in the last few months, it’s easy to mistake the stock market for a rocky riverboat casino. Without a doubt, investors can use the market this way, and many do. However, investing—when done properly—differs greatly from gambling.
One reason Wall Street has been looking more like an oversize craps table is the development of app-based brokerages such as Robinhood, which have been widely criticized for “gamifying” the investment process. Using these apps, investors are regaled with on-screen congratulations for making trades and are rewarded for winning trades with displays of balloons and confetti. Of greater consequence is the ease with which the brokerage has enabled investors to engage in high-risk trades such as options and cryptocurrency, practices that were implicated in the suicide of one young investor who believed he had lost $750,000 on a risky bet.
Social media has also fed a frenzy of trading in the market, perhaps most famously with members of the Wall Street Bets on Reddit pitting themselves against the hedge funds and shorting “stonks” * such as GameStop and AMC Theatres.
Fortunately, there’s an important difference between investing in the stock market and placing a blind bet at the gaming table, and that’s the expected return. In a casino, on average, the house wins. A correctly played blackjack game yields the gambler a 49.75 percent chance of beating the house. In craps, the odds fall to 49.6 percent. The chances of defeating a slot machine can be as low as 41.5 percent. On the whole, casino gamblers lose money because the long-term expected return is negative.
In the stock market, however, the average investor makes money, at least over the long term because the expected return is positive. The reason? There is input to the system beyond just a stack of chips, in the form of millions of talented and ambitious people whose hard work fuels the companies whose stocks are traded on the exchanges. As a result, these companies are able to develop new products and services that add value to the world. This value translates to higher revenue, and as time goes on, the value of market investments also increases.