Wall Street Steward Blog

Do You Feel Lucky???

“I do not invest in the stock market.  To me, that is gambling!”

One cannot imagine how many times I have heard this statement over the years.  Usually, the person is foaming at the mouth while trying to camouflage the veins popping out of their neck and head.  This statement is thrown at investment advisors with such venom that once we hear it, we think to ourselves “wow….another uneducated person.  Time to move on.”

Let’s begin this discussion with a simple definition of “gambling.” 

Gambling is the wagering of money or something of material value (referred to as “the stakes”) on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods.  Typically, the outcome of the wager is evident within a short period.

So, according to that definition, is investing in the stock market gambling? 

Does investing involve risking money?  Check. 

Is the outcome uncertain?  Affirmative. 

Is the intent of investing to make money?  Is a pig’s rear end……nevermind. 

Is the outcome evident within a short period of time?  Not so much.

There we have the problem.  One could argue that over a short term time period, the outcome is random and therefore investing in the stock market could be viewed as a form of gambling.  However, what happens  if we stretch the time period?

If we examine the S&P 500 index* (broad market indicator) over the past 75 years (1935-2009)*, it reveals some interesting things.  In 56 of those 75 calendar years, it has been profitable, while going down in value only 19 times.  That means that 75% of the time, during the specified time period, the S&P 500 index was positive for the year.

Another observation is that the average “positive” year has been +21%, and the average “negative” year has been only -12%.  Overall, the S&P 500 index has averaged 10.8% annually over the last 75 years (1935-2009).

In summary,  if an investment is profitable 3 out of every 4 years, and produces a 21% average return over those 3 years (as compared to a 12% loss in the 1 negative year), would you still consider that a “gamble?”   

Me neither.

Of course, past performance is not indicative of future results, but a 75 year track record should provide some perspective to these recent volatile markets.  This is a hypothetical example and is not representative of any specific situation.  Your results will vary.

Creative Commons License photo credit: DryIcons

Sources – Stock market:  Standard & Poor’s 500 Composite Index, with a reinvestment of dividends

*The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.  The S&P 500 Index is an unmanaged index which cannot be invested into directly.  Past performance is no guarantee of future results.