I was ten years old when my family moved to a different part of town, so I found myself riding a school bus full of new faces...and I mean full. Being one of the last children to be picked up on the route, there were not too many open seats to choose from, and I found myself seated with two older and larger boys. As the bus moved on, one of my seatmates started telling the other about some lyrics that he had written the night before. The listener was quite impressed as the lyricist rolled into the second verse, but they were both pretty upset when I piped up and delivered the last couple of lines myself! I had heard it before. My older brother owned the RUN DMC cassette that contained that very track. It took only a moment for one boy to realize that he had been caught in a lie, and the other to realize that he had been lied to. They handled these simultaneous revelations in a way that I didn’t understand at the time. They beat me up. The lesson I learned that day was that there is a price to pay for speaking up and revealing a lie to be a lie. Liars don’t like being caught, and many of those who have been lied to would rather not know about it.
Several years (and more than a few scuffles) later, I was offered insight by a highschool classmate. We met in kindergarten and she knew me better than almost anyone. She attempted to explain the root of my difficulties to me. “Everyone sees someone every day and thinks, ‘that guy needs to be put in his place,’ but you are the only person I know who considers it to be their personal responsibility to do so.” She was right. Over the years since then, I have gotten better at just letting many things slide, and I confess it has made my life easier. I still find myself tempted to correct bad information when I hear it, but I no longer feel the burden of having to do so. I have decided that, in most cases, nobody will be happy that I spoke up and I just might catch a beating for my trouble.
I share this backstory so that you might understand that it is not necessarily easy for me to step up to confront a certain falsehood today. In fact, this one has been a long time coming, but I do feel some responsibility to be the one to “set the record straight.” Over my career as an investment professional, I have heard many untrue statements delivered with great confidence. There is one that stands out, however, both in its frequency and the extent to which people clearly and deeply believe it to be true…
“There is no difference between and investing in the stock market and gambling with my money in a casino.”
Despite how this statement grates on my every sensibility, I confess that I have let it get past me several times. It rarely seems worth the effort to try to convince someone who seems so convinced that they are speaking the truth. This is a falsehood, however, for several reasons. Today I will discuss three.
The Long-Term vs. Short-Term
A great deal of thoughtful design goes into keeping casino gamblers into playing as long as possible. This is for a simple reason. While it is possible to go on short-term winning streaks, every game has a built-in mathematical advantage for “the house”. Over time, this outcome will inevitably result in losses to the gambler. This contrast of short-term versus long-term outcomes is completely the opposite of how investing works. While it is very likely that a diversified stock portfolio (pick almost any major equity index) will have down periods in the short-term, your probability of losing money actually decreases with longer investment periods. For example, there has still never been a losing 20-year period in the history of the S&P 500 index!
Powerful Forces at Work
There are only a couple of forces determining whether or not a person wins at a game of chance. You guessed the first one…chance. The second is mathematics. As we addressed in point #1, the laws of probability will always win in the long run. When gambling, one force is completely indifferent and the other is working against you.
If we compare the game of chance to stock investing, we will see a very different set of driving forces. Let’s use John Deere (DE) as an example. Owning a share of any stock means being a partial owner of that business. You own some small portion of all of the assets of that business and the value of your ownership stake will rise and fall with the profits of the company. In the case of owning DE shares, this means that you have roughly 70,000 employees. Every one of these people is paid to go to work every day and do their part to make John Deere a more profitable company. This applies to everyone from the sales force and executive officers to the person who attaches the steering wheel to a tractor. Every one of these people has an incentive to do good work for you, the business owner. Some own stock like you do, others receive bonuses, and many simply take pride in the quality of their work. Unlike the ball in a roulette wheel, these people are not indifferent to the outcome. Their job is to work in your best interests. That is a powerful force!
The Price is Printed on the Chip
A casino dealer will always give you a $5 Chip in exchange for a five-dollar bill. This is true regardless of the time of day or the day of the week. If you take home your $5 Chip and bring it back to the cashier a month later, you will still get five dollars back. This is different from the experience of owning a share of stock. You might buy a share for $5 in the morning and sell it for more or less later that same day. Acknowledging the risk of loss, there are a couple of advantages to the fact that a stock’s share price always reflects its market value at that moment. The first example is that sometimes stocks go “on-sale”. If you believe that the value of a share is $5 and you can buy it at “a discount” for $3, you are in a position to benefit from the price discrepancy. The second advantage is that with a share of stock you might make money simply by waiting. By doing nothing but holding your “chip” you have given yourself the opportunity to return to the “cashier” at a future date and exchange it for more than the $5 you paid.
I know that I will hear the comparison again, and I can’t promise that I will always make the effort to set straight a set of untrue beliefs. I will try harder though. Telling the truth can be a thankless act, but allowing falsehoods to go unchecked undoubtedly has a corrosive effect over time. Does each of us bear some responsibility to the concept of honest discourse to keep it grounded in fact? This is too big of a question for me, but I intend to do my part. I feel that I owe it to my readers, my industry, and myself.