Financial Freedom

The Stock Market Is Like a Casino… and That’s a Good Thing

  • To inexperienced investors and outsiders, the stock market may seem like a gamble with its short-term ups and downs.
  • But, as Alexander Green explains, there is no better way to grow your wealth in the long term.

Last week, after a round of golf at The Legacy Club in Longwood, Florida, a playing partner proceeded to tell the group in the 19th hole why he never invested in stocks.

“The stock market is nothing but a casino,” he explained. “Sometimes you win. Sometimes you lose. But everyone is just placing their bets and gambling.”

The other two players in the foursome tried to explain to him why this explanation was wide of the mark. But – as a dyed-in-the-wool real estate investor – he was having none of it.

The stock market scared him. And he was convinced that success or failure was just a matter of being lucky… or unlucky.

This opinion is fairly common among people with no stock market experience – or with one or two bad experiences. (Surely you’ve known individuals who voiced much the same view.) In fact, I’ve tackled the subject in this column before.

I generally concede that, in some ways, the stock market is like a casino, especially in the very short term.

Stock price movements from hour to hour – and even day to day – are largely random. It is only over longer periods that an underlying order and logic take hold.

Companies’ shares move up only to the extent that their earnings – their profits – move higher. (And the reverse, of course, is also true.)

Look back through history and you will not find a single example of a company that increased its earnings quarter after quarter and year after year without the stock tagging along, no matter whether we were in a bull market, a bear market or something in between.

That is why Warren Buffett’s mentor Benjamin Graham famously remarked that in the short term, the market is a voting machine. But in the long run, it is a weighing machine.

And what it weighs is corporate profits.

Aside from the inscrutability of stock movements in the very short term, there is another way that equity investing resembles a casino.

And this analysis is based on my own experience.

Don’t get me wrong. I have never been much of a gambler. And what small amounts I did gamble away as a young man I recognized intuitively as a dead loss.

I never fell prey to the fatal conceit that if I gambled long enough or smartly enough – as if there were such a thing as “intelligent gambling” – I would eventually win it all back… and then some.

I simply took a good look around the casino. While there were hundreds of people laughing and drinking and smiling (and frowning) at the tables… there was no line whatsoever at the cashier’s window.

Clearly, I wasn’t the only one taking my lumps.

These gamblers not only weren’t striking it rich, they were also paying for all those glittering towers. And I didn’t want to be one of them.

I recognized that the smart move was to be a casino owner. Not a casino gambler.

Few of us have the hundreds of millions or billions of dollars necessary to open and run a fabulous casino, of course.

Yet that is no obstacle. You need only own a few shares of a leading gaming company.

In fact, after that conversation with my golf partners last week, I asked Oxford Club Research Associate James Hires to run some numbers for me.

Here’s what he found…

Since the market bottom in March 2009, Century Casinos (Nasdaq: CNTY) is up 491%. Penn National Gaming (Nasdaq: PENN) is up 543%. MGM Resorts (NYSE: MGM) is up 1,386%. And Las Vegas Sands (NYSE: LVS) is up 6,962%.

So yes, the stock market is like a casino. Just be sure you’re the owner… not the gambler.

Good investing,

Alex


About

An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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