Mike Kueber's Blog

July 19, 2012

Should I buy stocks or do my gambling in Vegas?

Filed under: Investing — Mike Kueber @ 2:21 pm
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The roller-coaster ride provided by the stock market since the turn of the century has scared off a lot of potential investors.  Lots of my friends consider the market to be too risky, so they prepare for retirement by parking their savings in places that will almost certainly return less value (albeit only slightly less) than they started with.  So much for the “power of compounding,” which was the universal mantra at the end of the 20th century. 

The market naysayers often compare the stock market to gambling, and I have a friend who says he prefers to get his gambling fix by going to Vegas instead of playing the market.  He says Vegas gives better odds.  Is that true?

The major difference between Vegas and the stock market is that Vegas returns less than the amount bet.  If $100 is bet, Vegas will return only $90 or so and keep the difference as a commission, rake, vig, or juice.  By contrast, the stock market will, over time, return about 10% a year more than it takes in, less a relatively small amount for broker’s fees.  Thus, your chance of winning in the stock market appear to be much better than in Vegas.  But that conclusion may be premature because there is a double-edged sword in the stock trading that is more likely to cut you than protect you. 

While gambling in Vegas is essentially a game of chance, stock-market prices are driven by knowledge and information, and unfortunately those of us in the hinterlands have little of either.  When we are buying a stock based on our knowledge and information, someone else with more knowledge and information is selling that stock to us.  The same symmetry applies when we are selling a stock. 

Based on this information imbalance, I suspect that casual stock traders probably have as much chance of winning in the market as they would in Vegas.  But there is a winning strategy for the market and that is “buy and hold.”  People who employ this strategy (especially with index mutual funds) will likely have a positive return while minimizing broker’s fees and eliminating the need to battle wits with someone who is much better armed, figuratively speaking.