By Rainer Zitelmann, TES Contributor
GameStop punters, crypto-enthusiasts and many newcomers to the stock market do not understand the difference between investing and gambling. For them the capital market is like a casino.
There are many legendary stories of people who struck it rich on the stock market almost overnight. But you rarely hear about people who lost a lot of money or saw their savings evaporate bit by bit. Of course, you can approach the stock market like a casino: you hope to discover the “right” share and “bet” huge sums of money – and you can win. People who take this approach to trading usually have little real interest in the companies whose shares they are buying. In many cases, they are simply following “hot tips” from some stock market guru or advice from magazines or online forums. And, as long as they are aware that what they are doing is gambling, I have no problem.
The dumbest reason to buy a stock
But so many of these gamblers think of themselves as “investors” – and I have to strongly disagree. Investors do not rely on luck. They thoroughly analyze the assets they invest in, whether companies, real estate or anything else. The only reason gamblers, on the other hand, buy an asset is because they hope it will increase in value and that tomorrow or the day after another gambler will come along and buy it from them at an even higher price.
In particular, they are attracted to stocks that are en vogue right now and have already experienced sharp price rises. Warren Buffett, the genius investor, once said that the dumbest reason to buy a stock is because its price is going up.
If these “gamblers” were honest with themselves, they would realize that they cannot be successful forever. Of course, anyone who manages to “catch the wave” and invest when stock markets are rising will probably also “earn” money from their “blind” stock purchases. But even then, they would probably be better advised to buy shares in an index fund that, for example, tracks the global stock market.
The billionaire stock-market gambler
Stock market “gamblers” have one thing in common with slot machine gamblers – they like to brag about their “winnings,” but quickly forget their losses. And this can even happen to very rich people. I was recently speaking with a multibillionaire who became rich on the back of an incredible entrepreneurial idea. People like that often think that they understand a lot about “finance” and “money” – their financial success apparently proves it. Yes, such people do understand a lot about the business they built and got rich with. This billionaire gambles on the stock market. He admits to having lost a lot of money in the past, and did stop for a while, but started gambling again a few years later. He told me how he had made a profit in the tens of millions recently. I asked him if he kept a written record of his stock market profits and losses so that he could review them every year or two. He did not. In his case it was not so bad, because winning or losing a few million here or there did not have a major impact on his financial well-being.
But I cannot recommend strongly enough that every person who thinks they can get rich in the “stock market game” should accurately record their profits and losses every single year. If everyone did that, the “gamblers” would quickly realize that they have lost more money on stocks than they have won, or at any rate realize that they have fared worse than with a simple, broadly diversified, buy-and-hold ETF. Please take a look at a list of the richest people in the world: you won’t find anyone who has become rich by “gambling” on the stock market.
Real estate “flippers”
You won’t only find “gamblers” on the stock market. For a few years now, so-called crypto-“currencies” have been attracting hordes of speculators – including people who had never previously seriously considered investing in their lives. There are “gamblers” everywhere you look, even in the real estate market. In the early 2000s, real estate prices in cities across America exploded. Many “flippers” bought houses only to sell them again almost immediately at a profit. It was just like a stock market boom, where prices are skyrocketing and everyone expects them to keep on rising so that they can sell at an even higher price. Between 1997 and 2002, house prices in the U.S. rose by 42 percent. In New York City they rose by as much as 67 percent, in Jersey City by 75 percent, in Boston by 69 percent and in San Francisco by 88 percent. Mortgage lenders and homebuyers were in an absolute frenzy, and all of the normal rules of reason were suspended. The dream of getting rich quick worked out for some of these “flippers” in the short term – but after the bubble burst, many dreams ended in foreclosure and 100% losses on the equity they had invested.
If you want to build wealth in the long term, you must first learn that investing and gambling have nothing – absolutely nothing – in common. Investors are like expert chess players. They often think very long-term. They act thoughtfully and have a lot of knowledge about the game they are playing. Luck hardly plays a role in chess. I know this because I once had a friend who was a chess champion. Although she was several decades younger than me, I never beat her in a single match. In roulette, on the other hand, skill is of no use at all – you depend solely on luck. My money would be too good for that.
Rainer Zitelmann is a historian and sociologist and author of the recent book The Rich in Public Opinion, published by Cato Institute https://therichinpublicopinion.com/.