Stock Market Gambling

Gamble in Stocks NOT Casinos

Unless you are a professional, you are nearly guaranteed to lose your money if you gamble in a casino, card house, sports pool, or lottery.

Most gambling businesses operate on a 52%/48% odds (or worse). This means that over many plays each game benefits the house at a rate of 52% of each dollar, and benefits the gambler at a rate of 48% each dollar. Those odds may actually be much more favorable toward "the house", but they are NEVER in favor of the gambler. For every $1 million jackpot or big win at the craps table, there is a large number of smaller losses that add up to more than $1 million. This is how casinos, card houses, sports pools, and lotteries make their money. It is pure statistics.

Is the Stock Market Gambling?

So what if you have the gambling bug? What do you do if you can't resist the thrill of a chance to hit the jackpot? Many people claim the stock market is gambling. Let's take a look at that claim.

According to numerous studies of the stock markets over the last 30 years, the U.S. stock market (as represented by the 500 largest cap stocks) has average long term returns between 10% and 11% per year. U.S. small cap stocks have returned even more over than large caps, with long term returns of 11% to 13%. This doesn't happen every year, of course. It requires a long term investment approach to get these returns since they can vary a lot from year to year.

What do these percentages tell us? "Stock market gambling" actually isn't gambling in the conventional sense as long as you invest in stocks over the long term. The odds are actually in your favor as a long term investor: 110% for large caps and 130% for small caps but ONLY if you're a long term investor.

Still want to gamble? (If you're smart, you'll say "yes" after you've seen the stats above) Here's the solution: Open a discount stock brokerage account and buy 10-20 small-cap stocks between $1 and $5 per share. Then watch those stocks every day to see how much money you make or lose. Whatever you do, DO NOT sell those stocks for at least 5 years! LET THEM RIDE! If you get a few winners going then double down on those ones! This is just like concentrating your bets on card hands with the best odds - it causes your long term returns to jump up and covers the more numerous but smaller losses. Just like gambling, making a killing in the stock market is about odds and bet sizing, so be a long term investor, go with your winners and dump your losers.

The stock market is gambling except the odds of winning in the stock market are in your favor, not the casino's. You invest a set amount of money at the beginning and it's all-or-nothing with a big potential payout at the end. With the method above you get the same thrill as gambling but the game has an inherent upside bias in favor of you, the gambler.

If you want to dramatically increase your chances of winning big, try the CANSLIM method to pick your small cap stocks (it's beat the S&P 500 by thousands of percent over 20-30 years!). Google "CANSLIM" or get a copy of the Investors Business Daily. This takes some hard work to pick the right stocks, but once you do, you can get the same thrill watching your stocks as if you picked them randomly by throwing darts at the Wall Street Journal.

Alternately, you can put your money in a small-cap mutual fund if you have enough of it (usually $1000 minumum). You have more diversification but it won't give you the excitement of watching individual stocks move. Either way, if you take the money which you are guaranteed to lose at the casino and place it in the stock market as a long term investor, you will end up wealthier in the long run.

Trading IS Gambling

Here's what you should NOT do: Absolutely DO NOT day trade or trade stock options! These are low-odds games that favor the "house" not the player. 90%+ people who try day trading or stock options lose. Here's why you shouldn't play these games:

You need a complete trading system, years of experience and sophisticated tools to win. The learning curve is extremely steep and expensive. If you don't have the training and systematic discipline then trading is gambling against the smartest dealers in the house.

Bad odds: Options are essentially insurance contracts with significantly worse odds for the buyer than the odds at a casino (several studies have shown that the great majority of options expire worthless). You cannot "buy and hold" options because they expire and lose their time value which drops to zero if they are out of the money. Bid-ask spreads in options are extremely wide on a percentage basis. Option trading is gambling in the biggest way, against all odds.

High costs and taxes: Day trading will eventually kill your account due to high transaction costs, even if your stock picks break even. Finally, taxes eat up much of the profits you may manage to generate. In short, if the choice is between gambling at a casino or day trading or buying stock options, go to the casino!

Psychological biases: Studies conducted by behavioral finance experts indicate that natural human decision making processes run contrary to those of successful traders. Natural human cognitive biases cause us to misinterpret probabilities and act irrationally from fear or greed. It takes years of mental training to resist our natural tendencies to cut winners short and let losses run in hope they will turn around and become profitable. Even one slip or mistake can cause a huge loss.

SPECIAL NOTE: If you have a gambling addiction and cannot resist the casinos, ask somebody to manage your money for you and seek counseling immediately, because there is nothing here that will prevent you from giving your money away.

Because of the urge of people to gamble during recessions, casinos, racetracks, card rooms, and other such "entertainment" establishments tend to do well. The possibility of winning a big payout becomes more enticing when economic times are tough. As you can see from visiting Las Vegas, casinos make a lot of money -- your money! All gambling establishments exist to take your money away, and a recession is the worst time to give it away. Instead of giving your money away, buy some casino stock!