Actually my title for this weeks’ tip should have been “Why do so many people say that the stock market is gambling?”. But that was way too long. I hear all the time, about ‘playing’ the market. Just last week a lottery winner who was also a financial advisor of some kind said that the stock market was the biggest gamble of all.
But look at people who have succeeded in the stock market. Do we talk about “Bill Gates, that riverboat gambler” or “Warren Buffett, race track tout”? Hardly. No one thinks of them as gamblers. Yet they have gotten rich beyond almost anyone’s wildest dreams in the stock market using completely different methods (Gates with one stock, Buffett by buying pieces of many companies). So why is that not gambling, but buying 100 shares of IBM is? Let’s see if we can find out by doing a mental experiment.
Imagine you buy a nearby convenience store and run it yourself. Gambling? Hardly. Now let’s say someone else runs it. Gambling? Not really. Now let’s say that you don’t own the whole store, only 10% of it. Gambling? Feels a little more like it. Now let’s say that the convenience store is 2,000 miles away, and you’ve never seen it, you just bought into it because it was recommended to you by a broker. Gambling? Feels a lot more like it.
What’s the difference in those scenarios? They all involve buying a piece of a business enterprise. Notice I said nothing about the success of the stores. The sense of gambling has to do with visibility and control, not profits. Gates and Buffett have complete visibility and control where their stock is concerned. If you run a store, so do you. It’s only when it’s 2,000 miles away that the sense of gambling kicks in.
This is why people are afraid to ‘gamble’ with their lives flying in an airplane but think nothing of driving 500 miles. Yet last year no one died in a plane accident in the United States, and 30,000 people died in car accidents, 10 times the loss of life on 9/11. If you drive a car you have visibility and control. If you’re a passenger in a plane you have neither, even if it’s much safer. Gambling.
So what is the average investor to do? First, look at the numbers. Stocks have been the best investment over the last 200 years. Recognize that if over time most of the people make money, you’re the casino not the gambler. Next get some visibility. Find out about the companies you invest in. If you invest in mutual funds do a little research about their top holdings. Vote your proxies. Call investor relations about key issues. Give yourself that sense of visibility and sense of control (to the extent you can) so you too can be a wild gambloholic just like Warren Buffett.