The other day one of my investment club partners made a statement that is often repeated and really bothers me. He said that “the market is just gambling.” Can certain activity be analogous to gambling? Of course, but that doesn’t mean that “the market” as a whole is just one big casino, nor does it mean that your outcome is predicated solely on luck. I believe that every investor, whether they know it or not, determines whether they turned the market into a casino or whether they are actually buying a piece of a business at a fair price.
Blind Speculation is Gambling within the Stock Market
When someone bets on a company (or financial product) without doing any research it can be considered gambling. The partner I first mentioned, took a literal bet that $UA would miss earnings. Did he have anything to back up the bet? Not one single item article was even read. This may be an extreme example, but, yes, this is gambling. So when is investing not gambling?
Buying a Piece of Business and Treating it as Such is Not Gambling
When you buy a share of stock you are buying a (very) tiny piece of a business. Would it be gambling if you bought a very tiny fraction of your local hardware store while you are holding an audit report with regard to profit margin, net assets, etc? Sure, there is risk, but is it really the same as throwing it all on black?
Warren Buffet once said,
I have no idea what the stock market’s going to do tomorrow or next week or next month or next year.
If you own your stocks as an investment—just like you’d own an apartment, house or a farm—look at them as a business. If you’re going to try to buy and sell them based on news or something your neighbor tells you, you’re not going to do well. Find a good bunch of businesses and hold them.
If you really believed that the market was nothing more than a casino why would you ever invest in anything other than a broad market index fund?