economics

Is the Market Just A Casino?

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Some people experience a lingering reluctance to invest because they suspect Wall Street is a giant casino. Most of us understand that a casino will, on average, fleece its customers of their hard-earned money. But does the market actually function like that?

In reality, a share of common stock listed on a stock exchange represents a percentage ownership interest in a large enterprise. A bond represents money loaned to an enterprise or government for the promise of stated interest and a return of the face amount on the maturity date.

Shares of a successful business or bonds issued by a solvent company tend to reward long-term holders by returning amounts in excess of the original investment. These increases may be in the form of interest on bonds or dividends on stock, plus preservation or growth of the principal invested. These kinds of investments are not like a slot machine or a roulette wheel, games rigged by casinos to pay out only a fraction of the money wagered.

The amazing thing about a share of stock is that an owner receives the same proportional benefits whether a single share or millions of shares are owned. The companies associated with Warren Buffett, Bill Gates, and the Walton family are well known to many. And anyone who wishes may invest in those companies on exactly the same basis as Buffett or Gates or
the Waltons—and enjoy the same percentage results.

(We are not recommending or advocating the purchase of any specific company to anyone, of course.)

The flawed casino analogy may seem plausible since some investors engage in short-term trading, speculation, and other aggressive tactics. But how one uses the market is within one’s control, and the practices of short-term traders have nothing to do with long term investors.

One person may use an automobile as a getaway car after bank robberies, while the next one uses a car to commute to work. The misuse of a vehicle by the robber has nothing to do with the usefulness of the vehicle to the commuter.

So for you and for us, the answer is, “NO!” the market is not a casino.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investments involve risk and may lose value.

Behavioral Economics and The Price of Stability

Stone wall with gold letters spelling out STABILITYThe first theory of economists was that human beings act rationally. When they realized they needed a new theory, the field of Behavioral Economics was born.

One of the key findings of Behavioral Economics is that the pain of a loss is twice as great as the pleasure of a corresponding gain. Rationally speaking, if you earn $5 it should feel just as satisfying as if you earned $10 and then lost $5 of that—but we still feel the sting of the loss harder, even though the outcome is the same.

If people weigh these two otherwise identical outcomes differently, when it comes time to invest they will wind up paying more for $5 earned in stable investments than they would for $5 earned in volatile investments. There is no shortage of expensive products designed to pander to this tendency by selling the promise of stability at a premium.

The necessary conclusion we see—the one nobody else seems to—is that if the price of stability is too high, the potential rewards for enduring volatility must be larger than they otherwise should be.

These concepts shape our work, our strategies, and our tactics. “The pain of a loss” is determined by one’s mindset, training, and understanding. Many great investors (and many of our clients) feel no pain over short-term losses. Some are even gleeful at the chance to buy securities at bargain prices. One of our roles is to help you develop more productive and effective attitudes about investing, and we believe that by training yourself out of irrational pain over short-term volatility you can perform better in the long run.

The opinions voiced in this material are for general information only and are not intended to provide specific investment advice or recommendations for any individual.

The illustration is hypothetical and is not representative of any specific investment. Your results may vary.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.