Investing In Stocks Is The Opposite Of Gambling

Needless to say, my dreams of grandeur didn’t go quite as expected. Don’t get me wrong, I had a great time hanging with friends and experiencing Las Vegas for the first time. It was the “come back a king” part that didn’t work out. Let’s just say, my wallet was much lighter leaving Vegas than it had been when I arrived.

I followed all the strategies yet I still came home broke. What went wrong?

I’m sure this may come as a shock (insert sarcasm…), but, even though it can be fun and exhilarating, gambling is specifically designed for the player to lose. Each time you roll the dice on the craps table or spin the roulette wheel, you are more likely to lose money than you are to win it. This simple fact allows the casinos in Las Vegas to earn literally tens of billions of dollars every year. You read that correctly. They bring in TENS of BILLIONS, each and every year, all from people like my younger self, trying to win big.
Though every casino game has different odds, the house pretty much always has the edge. Usually somewhere between 0.5% and 15%. This “edge” translates directly to the average profit a casino can expect to make over time on a particular game. For example, the house edge in blackjack is typically 0.5-2% so a casino can anticipate a profit of 0.5-2% of the sum of all bets made on their blackjack tables. That may not sound like much, but with hundreds of thousands, or even millions, of dollars being wagered on a daily basis in a single casino, the numbers can add up very quickly. It should also be noted that blackjack, with its 0.5-2% house edge, is one of the most “player friendly” games. Some other games give the house an edge of up to 15%!

Since gambling involves games of chance it is impossible to accurately predict the outcome of any individual session of play. However, long-term regular gambling will always trend toward the mathematical odds. As a result, any regular gambler should expect a negative overall rate of return on their money.

So how is investing any different? Especially if we’re talking about investing in the volatile stock market. Isn’t it just another form of gambling?

That couldn’t be further from the truth.

Not only are investing and gambling not the same, they are actually total opposites in many ways. Let me explain…

While gambling gives you a slight chance of coming out ahead in the short-term, unfavorable odds, which result in a house edge, mean you have almost zero chance of making a profit over the long-term. Conversely, though the growth of an investment in the stock market can also be unpredictable in the short-term, historically, any such investment has always resulted in a long-term gain. In fact, there has been no 20 year period in history where an investment in the stock market would have resulted in a loss. The “worst case” would have resulted in a yearly gain of 2.5%. But what about on any given day?

Since the year 1950, there have been a total of 7,135 days where the market declined. In that same time, the market has had over 18,000 positive days. That’s more than a 2.5 to 1 ratio! In other words, over the last 69 years (i.e. 1950 to 2019) there was approximately a 72% chance that the stock market increased in value on any given day. That’s about as far from gambling odds as you can get!

Jef is a good blackjack player. He hasn’t quite mastered card counting, but he knows how to play well enough that he always makes the most mathematically sound decision on any given hand (i.e. he hits when he should hit, stands when he should stand, doubles down when he should double down, splits when he should split, etc.). At his level of skill the house only has a minuscule 0.5% edge.

One day he decides it’s time to get serious about saving for retirement, and what better way to do it than by taking advantage of his superior blackjack skills? He develops the perfect plan.

Each month he will take $250 to the casino and use it to play blackjack. When he leaves the casino he will deposit all of his winnings, plus the initial $250, into a traditional savings account to be left alone until retirement. Jef believes that by saving $250 per month plus the blackjack winnings he plans to make, he’ll be able to build a nice-sized nest egg by retirement. He implements his plan and follows it faithfully for the next 30 years.

Assumptions:
House edge = 0.5%
Gambling Amount = $250 per month
Years Of Gambling = 30
Total amount contributed = $250 x 12 months x 30 years = $90,000
Final Account Value = $89,550

After three decades and countless hours spent in the casino gambling, Jef will retire with a nest egg of approximately $89,550. Even though in total he contributed $90,000 to his gambling efforts, he still ended up with slightly less. 0.5% less to be exact. Over the years Jef had some big wins and some big losses but he was ultimately unable to overcome the odds. Even with just a tiny 0.5% edge, the winnings inevitably trended toward the house.

What if instead of using his gambling prowess to save for retirement Jef had chosen to invest in the stock market? Let’s run the numbers.

Assumptions:
Rate Of Return = 8.5%
Contribution Amount = $250 per month
Years Of Investing = 30
Total amount contributed = $250 x 12 months x 30 years = $90,000
Final Account Value = $415,600

By investing his money instead of using it to gamble, Jef could have saved an additional $326,050 (i.e. $415,600 - $89,550)! In addition, he could have saved himself hundreds, if not thousands, of hours of traveling to and from casinos and wasting away sitting at blackjack tables. I think the right choice is pretty clear.

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