Can you make more money gambling in a casino or investing in the stock market?
Both investors and gamblers make decisions on where to place their money based on the likelihood of certain events happening. The probability of high gambling returns is low. In fact, the slot machine is the ultimate game of chance as its returns are random. You have no control over whether a row of bananas or cherries will appear. The odds of getting a winning combination are the same as for being hit by a comet – one in 1.6 million.
When you invest in the stock market, you have slightly more control over the outcome since you get to pick the stocks. While you can’t predict future growth, you can look at a company’s fundamentals, evaluate how its directors make decisions, and decide whether you think it has a winning model. While past performance isn’t a guarantee of future results, past earnings can give you a sense of how a company may react in different market scenarios.
Probable vs. potential loss/win
If you invest in a stock with reliable earnings and revenue growth, you increase your odds of success. Across the risk spectrum of investments, you can choose to gamble on uncertain outcomes (high risk) or invest in more certain outcomes (low risk). So why do some investors choose to gamble? Theoretically, investors are paid higher returns in exchange for accepting higher risk, but the odds of succeeding are lower.
Consider the retirement scenario of the gambler who invested in dot-com stocks with no revenues or earnings. Most dot-com stocks failed. This is the risk of betting without looking at your cards.
To establish a risk level that reflects your ideal safety level, listen to my podcast where I discuss risk and safety levels here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published March 12, 2018.