When you step into a casino, a night of gambling brings fills you with dreams of exiting into the cool night air with your pockets overflowing with the huge sums of money that you won! However, the far more common outcome is stumbling out of those doors bleary-eyed with your pockets far lighter than when you entered. For many, investing in the stock market can feel like this too. At some point in their lives, every investor will, at some point, see their portfolio drop by 30, 40, or even 50%! These losses can make it feel like the stock market is just as random as the casino.
Investors, however, have a few huge advantages over gamblers:
A long-term time horizon
The ability to win without playing a game that favors the "house"
A gambler's "time horizon" is measured in the number of hours, evenings, or even days spent at the tables. The goal of the casino is to keep you in your seat for as long as possible to ensure that you keep gambling. This is because they know that the longer you spend gambling, the better the casino's chances of permanently making your wallet lighter. The odds for the various "games of chance" in a casino always favor the casino (thus the adage "the house always wins"). Though how much advantage the casino has varies based on the game and bet you make, the casino never is at an odds disadvantage. These odds, when combined with tens or hundreds of thousands of bets, means that casinos should always generate a profit from their games!
In spite of these odds, casinos know for a fact that they will, at some point in their operation, suffer significant losses. A slot machine will, at some point, payout the jackpot. Fortune will favor the gambler as the roulette ball will fall on their bet of double zero. The dice on the craps table will roll in just the perfect way as to pay out a massive sum of money to the lucky person at the table who is now everyone's new best friend. When this happens, one thing you won't see the casino do is to stop all gambling and close their doors. In fact, this would be one of the worst things that they could do in this situation! They need to keep people gambling because their entire business is built on the foundation that their customer's losses will exceed their own, as long as they are patient enough to wait. The hope, desperation, or greed that motivates their customers to continue gambling is what ensures that the casino will continue to profit in the future.
Investors have similar opportunities as these casinos. The stock market is expected to yield high returns over long periods of time because stocks are volatile. If stocks were more predictable and their future prices could be reliably calculated, stocks simply wouldn't grow as much as they have historically. Higher degrees of certainty always come at a price. In the case of stocks, that price is paid with lower returns. Conversely, lower degrees of certainty means a premium paid to the owner of a stock, as long as they are patient enough to see that premium paid out.
For most investors, whose primary investment aim is to fund their lifestyle when they no longer earn an income, this premium has enough time to create magnitudes of wealth far greater than the value of the investments they made. These returns can only be realized, of course, if an investor holds their positions through periods of sharp declines. These declines are an investor's version of the casino having to pay out a jackpot. Fortunately, just like the casino, an investor has the odds heavily weighted in their favor! Where casinos rely on large numbers of bets, investors rely on a large number of days, weeks, years, and even decades in the market! As long as an investor stays the course when they have to "pay out the jackpot" via sharp declines in their portfolio, they will be rewarded over the long term with high returns.
An investor has an additional advantage during times of volatility that a casino simply doesn't. While a casino simply has to wait for enough additional bets to be made in order to recoup their losses, an investor can both wait AND take additional action! Most investors don't invest all at once. Instead, most investors make purchases every few weeks or months. This is because most people invest as they earn income rather than having funds to invest all at once. Because these investors are putting in additional money on a frequent basis, they actually are able to benefit from the market decline! They get to buy their investments while they're on sale! As long as an investor holds their stocks and doesn't stop their systematic investment, the market downturn can actually turn out to be a huge benefit for them!
There are some who believe that successful investing is best accomplished by day trading or stock picking. I would argue that these are not investors and are instead more akin to the gamblers sitting at a slot machine. Rather than choosing to invest, which is a long-term pursuit with odds of success that are unrivaled, they are choosing to gamble or speculate with their money.
While gambling or speculating is not inherently bad, it needs to be viewed in the proper manner. Just as one should not try to win their way to prosperity at the craps table, neither should one try to speculate their way there in the stock market. Rather than relying on the proven track record of the broad market to compound and create wealth slowly, a gambler chooses to purchase an individual stock in the hopes that they are lucky enough that the stock price of that specific company goes up quickly so that they can sell it for a profit and move on to their next wager. A gambler chooses to bet against the house, rather than being the house itself. On the other side of their bet is often a hedge fund, mutual fund manager, or pension fund with such a high information advantage that beating them at their game is nigh on impossible to do for any meaningful length of time or with any worthwhile level of consistency. Even if this weren't the case, stock market speculation is far more difficult than gambling. Not only do you have to "bet correctly" when purchasing a stock, but you also have to do so when you sell the stock as well! Though the siren song of day trading may be compelling, one should do all they can to ignore this call. Speculating in the stock market should be thought of as playing roulette with your financial future but with even worse odds!
When a gambler makes their bets on the stock market, they open themselves up to large amounts of risk with which investors simply need not concern themselves. While the market at large has a 54% to be higher at the end of the day than it was at the beginning of the day, the same is simply not true for each of the stocks that comprise the market. A casino isn't going to rely on a few bets to make their profits. In fact, they won't even rely on a few hundred bets! Doing so would, at some point, cause them to go out of business when the risk they've taken goes against them. Instead, as mentioned above, they spread their risk across thousands and thousands of bets to ensure that any single bet won't bankrupt them. Gamblers face the same problem as a casino does in this regard. By betting on individual holdings, they open themselves up to the possibility of financial ruin if their bet goes sideways. Conversely, an investor diversifies their investments across many companies at a time to ensure that any individual bet (or even several bets) going against them doesn't cause their entire portfolio to fail. By doing this, the investor takes the role of the casino and heavily tilts the odds in their favor.
We all have a choice as to what game we want to play to achieve our goals. The good news is that one doesn't need to speculate to be successful! One can instead play the far more favorable odds of long-term investing. Playing these more favorable odds is by far the easiest thing an investor can do to be successful long-term. By investing long-term instead of speculating or day trading, one transforms from being the gambler in the casino to being the casino themself. And, as is often said, "the house always wins".