Many people have a preconceived notion that the stock market acts like a casino. This might be true, but only for those who treat it like one.
“The stock market is a device for transferring money from the impatient to the patient.” — Warren Buffett
There are people out there who have made vast sums of money in a short amount of time via the stock market. That’s undeniable.
Perhaps they invested heavily in a small biotech company right before it had a new drug approved, or maybe they happened upon a penny stock that skyrocketed due to an acquisition.
Sometimes, it’s just blind luck.
In 2014, some people hit the jackpot on a penny stock called Nestor Inc. Nestor was a company based in Rhode Island with around 90 employees that sold traffic enforcement devices. But over the course of a few days, the stock jumped about 1900%.
So what caused such massive growth?
Unsurprisingly, it wasn’t that the traffic enforcement business was booming. In fact, Nestor Inc was actually defunct by the time this happened, having gone into receivership in 2009.
What had actually occurred was that investors had confused the small company Nestor with Nest — a high-tech thermostat maker that had just been acquired by Google. Everyone flocked to invest in Nest, accidentally invested in Nestor instead, and sent the penny stock skyrocketing.
These things actually happen a lot more than you might think. In fact, something very similar happened again not so long ago on the release of Pokemon Go, when everyone wrongly assumed that Nintendo had made the game.
If you approach the stock market believing you will be one of these people whose portfolio jumps by 1900% in a matter of days, you’re only setting yourself up for disappointment.
These people got lucky…very lucky. In fact, you might as well go out and buy lottery tickets if you believe that you’re as lucky — the odds are probably better.
One of the biggest myths I regularly have to contend with is the idea that the stock market is like a casino. Usually, I hear this from people who have lost money in the market, or simply don’t understand it. Of course, you can treat the stock market like a casino, but that doesn’t mean that it is one.
The best odds you can get in a casino are on the blackjack table and the craps table. In blackjack, if you employ what’s called ‘basic strategy’ and play one hand, you almost have 50–50 odds. Almost. On the craps table, a ‘pass line’ bet will generate similar chances.
However, the longer you play, the more the house edge eats away at those odds.
High-frequency day traders face the similar odds on Wall Street. They bet on the daily movements of stocks and get it right about half the time. But like Vegas, the more they play, the more they end up losing as any profits made are eaten up by taxes and trading fees.
In fact, Vegas was probably the better option — at least they’d get free drinks!
The great investors — the ones who consistently generate returns over decades — practice patience. They don’t do this out of laziness or in an effort to become more zen-like. They do it because it works.
If you were to invest in the S&P 500 on January 1st and hold on to that investment for a year, your chances of losing money are about 33%. We know this because the stock market declines about one in every three years. Those odds are good, but not great.
The longer you hold onto that investment, however, the more your chances of losing money decrease.
If we were to look at the entire history of the stock market — going back all the way to 1926 — and conducted the same experiment in ten year blocks, your chances of losing money drop to 6.1%.
Or to put it in other words, in the 81 ten year segments that have occurred since 1926, you’d only have lost money 5 times. And of those 5 times, only 2 have happened since the Great Depression — in 2008 and 2009.
It gets better. If you were to invest money for longer again and hold on for a 20-year block, at no point in the history of the S&P 500 would you have lost money. Never!
That’s a 100% win rate.
The stock market isn’t a casino. Those who think they can get rich quick through it turn it into one, but only for themselves. If you practice patient, disciplined investing, history shows that time and time again, you can get rich — slow.
Now that’s what you call a safe bet.