“Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight.”
Daniel Drew, 1797-1879, American businessman
“Investing in the stock market it like gambling.” I have heard some version of this statement my entire career.
Is there any truth to this comparison? Is investing like buying cows in the moonlight? I would adamantly and passionately respond NO!
Now, I understand how fluctuation in the stock market can make it feel like gambling at times, but let’s step back and realize what we are doing when we invest and what we do when we gamble.
If I go to the casino or buy a lotto ticket it is my hope that I put in a small amount of money and turn that into a large amount of money virtually instantly. Although the possible it is most certainly not probable. I remember in my statistics class as University of South Florida we ran the statistical probability of winning the lottery or getting struck by lightning … let’s just say the lightning was the clear winner!
With gambling the deck is stacked against me, thus the saying “the house always wins.” I will lose money far more often than I make money. Yet, Vegas casinos are packed, and lotto tickets are sold by the millions.
Let’s compare and contrast going to the casino to investing. When I invest in stocks (equities) I become a small owner of the corresponding company that I own stock in. So, for example, let’s use my high school employer Dairy Queen. If I own shares of stock in Dairy Queen, I am a small owner of that company. When Dairy Queen makes profits the owners are the ones who benefit. If I own stock in Dairy Queen, I am an owner and thus I benefit. Now, are there seasons in which Dairy Queen stock may struggle and go down in value … sure. Are there times its valuation if fairly flat … of course. Likewise, there are times the value of the company value increases significantly. I’m an owner of a profitable company that seeks to maximize its return for its owners … also known as its shareholders … also known as me if I own that stock ????
As the sole owner of my firm Intentional Wealth, my business brings in revenue, pays expenses and the remaining profit is distributed to me as the owner. That is how virtually every business operates. Lord willing, I will run and operate this business for many years (decades) to come, but at some point, if I was looking to sell it, a future potential owner would look to value the business to make me an offer to sell. The more profitable my firm is the higher the sale value of it would be. The value of my business really only matters when I go to sell it, what the value is moment by moment really is insignificant to me as the owner.
Same exact concept is in place with the stock market, but publicly traded companies have thousands or millions of owners (stockholders) and they are constantly looking to buy or sell their holdings. When there are more buyers than sellers the price of the stock generally rises, and when there are more sellers than buyers the stock price generally decreases. These valuation changes can feel uncomfortable for sure, but because there are usually thousands of buyers and sellers every day of publicly traded companies it’s just par for the course. Regardless of short-term stock price movements, those who run the companies continue to produce their products / services and seek to maximize the value to their owners (shareholders). I am the owner of companies that produce and create profit, even if there are short-term timeframes where the value of the company decreases, I still completely believe stock ownership is an exceptionally efficient way to build wealth … just don’t watch the price movement moment-by-moment.
I would classify “investments” in such things like cryptocurrencies, currency swaps, gold, etc. closer to gambling than investing. These are not profit-generating assets … they don’t do anything … they just sit there. A business on the other hand works hard to produce profits … I would far prefer to invest in an something that generates profits than something that just sits there ????
With gambling I am purchasing a chance of making it big, with investing I am owning a business that generates profit. With all due respect, those are vastly different things!
As I type this email, I am on an airplane flying to a family reunion. My 9 year-old son David is sitting next to me and watching me type this email. He said “Dad … I see what you are doing here … you are helping your clients better understand investing so they will be more successful investors.” Indeed, that is my hope ????
Have a blessed week ahead and a wonderful 4th of July!
It is an honor to be your financial partner!