“The stock market is like gambling,” someone told me earlier this week.
I understand such feelings.
Thanks to inflation, the Russian invasion of Ukraine, and other factors, the markets are more volatile than normal. The S&P 500 is a prime example. It fell 12% earlier this year. It has since recovered about half that year-to-date loss…but who knows what’s next?
So, yes, investing in stocks can sometimes feel like gambling. But there are big differences.
Gambling is an activity in which winning is quite uncertain. In fact, if gambling didn’t result in most players losing most of the time, it wouldn’t be a viable business!
Think about it: The bettors put up the money, a few lucky players get back more than they wagered, and the house ends up being the real winner, day after day after day.
Investing, on the other hand, is purchasing a stake in a company. When the company makes a profit, all the stockholders (i.e., investors) get to share in that profit.
Now, because of market conditions, short-term investments may or may not result in a profit. However, history shows that when a business is well-run over the long-term, its owners (i.e., stockholders) reap the rewards of their investment.
See the difference? Gamblers rely on hunches, gut feelings, and luck. Investors rely on facts, business fundamentals, and a company’s long-term performance.
Investors look at data like this: In 2002 the average company in the S&P 500 earned about $50 per share. By 2022 that number was around $250 per share—a five- fold increase.
Investors know that the price of a stock represents the collective opinion of the market. They realize that opinion is affected by wars, inflation, politics, the price of oil…and countless other factors. They understand how such opinions are often exacerbated by fear and greed…and can change quicker than a Louisiana weather forecast!
All this is why investors focus primarily on company earnings—not stock prices. Earnings aren’t driven by emotions or opinions. Earnings are facts.
Years ago, a noted investor named Ben Graham said that in the short run, the financial markets are like a voting machine. They identify which businesses are popular and unpopular. But in the long run, the markets are like a weighing machine. They assess the substance of each company.
Bottom-line, shrewd investors know that what matters is a company’s ability to earn money over the long-term—not the investing public’s fickle opinion about the company’s prospects in the short-term.
To be sure, gyrations of the markets can be nerve wracking. But when wise investors start feeling anxious, they focus on facts.
They look, for example, at the history of the Dow Jones Industrial Average, that famous index of 30 large, publicly owned companies trading on the New York Stock Exchange.
What they observe is that America’s best run companies have a long-term track record of rising profits. In 1980, the Dow was at 1,000. In 2000, it was around 10,000. Today, it’s about 35,000.
But currently, stock prices are volatile. And I’m not asking you to feel good about the account balance of your 401(k) plan going backwards. That stings! I am, however, asking you to focus on facts.
For the last hundred years, long-term participation in America’s capital markets has been one of the best ways to grow and protect one’s wealth.
So, in anxious financial times like these, acknowledge your feelings. But don’t let them control your decision-making. Investing in good companies can sometimes feel like playing roulette. Over the long-term it’s actually a really smart bet.
To help you think through such issues in more detail, I’ve created a comprehensive checklist of pre-retirement questions for people who are 60-something. It’s free if you’d like a copy. Just email me at firstname.lastname@example.org, and I’ll send it to you right away.
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