What do you see when you look at your investment portfolio?
To some investors, it seems like small bets scattered across many stocks.
But what really are we doing when we buy investments?
Let’s begin with what you are actually buying; Assets and Cash Flows.
With gambling, your dollars are handed over to some dealer or slot-machine and you are returned with chances. These are basically opportunities for you to get some return on your capital. Your returns depend on the game you play, and in certain games, the opponents you play against. You do not own any assets, just a chance to win something.
With investing, your dollars are handed over to either an investment manager or the owner of another company. An investment in an individual stock actually provides you a small ownership stake in the underlying business.
Take Disney for example, if you had purchased stock from the company, you would be provided a certificate (see below) that proved you owned a percentage of the firm. This stock will increase (decrease) in value as the business of Disney grows (falls).
With investing, our goal is to grow wealth over time. With gambling, our focus is to make a few quick bets and hope we make the right decision. Ask yourself, where are you focusing your attention? Wealth building or quick wins?
Next, let’s look at the odds.
There’s a famous quote that pretty much explains gambling and your odds of success. Everyone has heard it as it has been repeated for decades.
The House Always Wins
So, if we know the house is going to win, why do we partake? Shouldn’t our focus be to deploy our money in the best places to successfully earn a return? If we look at some data from Oppenheimer, we can see some major differences between gambling and investing in the stock market.
The average casino game runs at about a 40-45% chance of winning. That means with every bet you make, you have a larger chance to lose than you have to win. Yet every year, millions of Americans board a plane to go lose all their money in Vegas.
If we look at investing, the big key is that time is your biggest asset! By looking at over 90 years of stock market returns, we find a 75% chance of positive US Stock market returns over one-year rolling periods. And over 15 year periods, that return chance is over 99%
Ironically, the longer you sit at a table in Vegas the worse your odds get.
Yet, the longer you can invest in the stock market, the better your odds get.
As investors, we need to establish a plan for how we might invest, and then work as hard as we can to maintain it. Allowing time and compound interest to do their work will drastically improve the outcome of your investing.
Take Warren Buffet, for example, sure he made significant money in his 30’s and 40’s, but the bulk of his net worth was the product of extensive time and compounding. If we can all aspire to set a long-term focus on some portion of our investments, we will reap the reward of compounding our wealth!