“The stock market’s not an investment, it’s gambling.”
Nov 23 2010
I ran across this article on the CNBC web site. I found it insightful but I think the story between the lines, the one that’s not told, would be more helpful to investors. The article explains investor fears in the stock market and how this fear has steered more investors to conservative accounts. It goes on to state why this investor behavior may be a mistake. Agree. However…
A quoted investor states she took her money out of stocks in the summer of 2008. The investor had been in and out of the stock market before and now has no intention of getting back in. She states, “It makes me nuts when I get out early and there is more money to be made, or I get out late when I could have made more if I’d gotten out early. The stock market’s not an investment, it’s gambling.”
And there we have it friends, the crux of the problem…people behaving like this have no idea how to invest.
Blaming the stock market as the problem diverts your attention from the real problem which is the lack of an effective investment strategy on the part of the investor. The action described in the quote above guarantees failure. It fails because the action of buying and selling is based on guessing. To add insult to injury, it’s our emotions driving the guesses. Hunches and emotions aren’t a strategy and we ultimately lose.
The stock market goes up and down. This is no secret and it’s no surprise. It is the very nature of any market…stocks, bonds, commodities, currency, business cycles, you name it. No one knows when it goes up or down, no one. And yet people, with no plan or knowledge, think they can guess when it goes up or down and base their future financial success on their guesses? Does that max out the ridiculous meter for you as much as it does for me? Folks use this guess work every day thinking that’s how the investment game is played. It’s not a game, it’s the quality of your life in the future and that requires serious plan.
No one will ever guess correctly. We aren’t wired to guess correctly.
We don’t think to invest in markets until they go up. Even then, we don’t invest until stocks have gone up enough to ensure our psyches that it is “safe” to dive in. Positive talk on the street = time to invest. By then it’s too late; the upward cycle is coming to an end. When we feel greedy or we feel we are missing an opportunity that everyone else has jumped on already, we take the plunge. Want to buy gold any one? Here’s a tip to follow, when the people who know nothing about investments or investing start to talk up an investment, RUN AWAY from the investment. The great unwashed masses are always the last to jump on an investment before it pops. By the time it pops, the knowledgeable investors have harvested their profits and left the masses holding the bag. Then the masses blame the market and prosperous people instead of looking in a mirror.
We dump out of the market when things go down. Even then, we don’t dump until it’s gone waaaayyyy down because we aren’t sure at first if it’s just a blip and may go back up. We invested at a high point and we’ve lost value so we are emotionally attached to the investment until we regain some of our value. When value isn’t regained but goes down some more, eventually we can’t take it anymore so we sell.
We invest high and sell low, just the opposite of what we are suppose to do. This rips the guts out of our returns. Then we blame the market. To succeed, you must have a plan that forces you to buy low and stops mindless trading.
For those of us who continue to work and invest through our employer plans and IRAs, I believe strongly in the philosophies and strategies we have shared on the pages of this blog and in our presentations. You can be successful if:
• You understand some of the history of our country and our economy.
• You take the emotion out of your investment plan.
• You use strategies that take advantage of known market conditions.
• Strategies: 1) Average down, 2) Proper Allocation, 3) Re-balance
If you want to learn more about the details of the bullets topics above, see these posts:
The Average Investor Parts 1, Part 2, Part 3, Part 4
We’ve had 401ks and IRAs for over 30 years now. These investment plans shifted the burden of planning for your comfortable retirement from companies with pension plans to you overnight. Your comfortable retirement completely rides on your shoulders. You would think, given the unconditional necessity that we be successful with our investments, we would put more time and effort into learning how to ensure a satisfying future. Instead like the person quoted in the article, folks have no clue, put no effort into learning, and manage by the seat of the pants. They base their actions on false assumptions: that markets will continue to go up and that they can buy and sell their way to prosperity. They couldn’t be more wrong. It’s possible we could all be successful if we took the task more seriously and planned soundly.
I disagree with you. The thought process behind your philosophy for years was “will the market be higher in 5 or 10 years than it is now. At one time the consensus answer was yes. I’m not convinced that is true anymore. Will we ever reach NASDAQ 5000 again? It’s been 10 years , and we are not half way back. How about DOW 14,000? I’m not sure about that one either. The point being, traditional philosophies about long term investing may no longer be relevant.
There was a recent 60 minutes program that showed massive institutional investors and very sophisticated formulas that trade in a fraction of second many times a day based on various stock price “movement” only. Note these formulas apparently have no relation what-so-ever to the intrinsic value of the company, its performance in the marketplace or any value proposition other than movement up or down of the trading prices. To top it all off, the machines are making the trades with no human oversight (other than the obvious fact that humans design the formulas and proprietary criteria for the movement buy-sell algorithms). Between the huge institutional investors and/or the sophisticated formula machine trading, I feel us individual investors using a broker don’t have a chance. I also took all my money out of the stock market and I don’t have a clue where to put it. I am really perturbed that the only advice I get is the “spread the investments, dollar cost averaging, long term strategy” stuff which may have merit for 40 year olds with 20 years to gamble on the market, and yes I use the term gamble. So what do us guys in our 60s that have amassed a bit of dough but can’t risk losing it, are about to retire and will need a monthly check or draw to supplement our pensions do? Buy an annuity? I would like to leave my heirs something and not tie up all my capital in an annuity that goes away when I croak. I guess I want my cake and wish to eat it to, and I understand that there is no free lunch, but if anyone has an answer to this situation I have described, that I’m all ears.
The lack of an effective investment strategy was not the reason my wife and her family lost their fortunes in the recent decline of the stock market.
Rather, it was unscrupulous business practices by company management and the failure of the board of directors of Wachovia Corporation to exercise their fiduciary responsibilities, ultimately resulting in the collapse of the banking giant and rendering its once valuable stock nearly worthless.
My wife’s family were all longtime shareholders of Wachovia stock, and all participated in dividend reinvestment rather than collecting dividends. The stock was a family heirloom, having been inherited from her bank-founding grandfather. When Wachovia collapsed, my father-in-law alone lost more than $5 million in individually held shares; money which he had intended to leave to his children as their inheritance.
They did not “buy low and sell high.” Rather, they bought and held the stock, trusting in the historical performance of the market, regardless of any short term losses or gains.
I theorize that many Americans who now shy away from the markets have similar experiences to share, but your one-sided piece blaming investors is a short-sighted view, to be sure.
Good article. The information presented is supported by many sources.
If I were investing in a business the first question I would ask is what are they going to use my money for?
Answer. Unless I am buying an IPO the business never sees my money. The only person seeing my money is the investor who is selling the stock and the brokers and dealers who charge a commision on the transaction. (OK there ability to borrow more money may go up as the stock price gos up.)
What is the business I am investing in expected to pay me each year on my investment?
Answer. There are a few, very few companies that pay a dividends at even a modiest 4% rate.
But, shouldn’t I expect the price of the stock to go up if the business is making money?
Answer. Yes you should, but how is the company using those profits? And more importantly how is the company preceived to be using those profits. At the end of the day there has to be a buyer that thinks the stock will still go higher than the price you are asking.
Am I in control of anything?
Answer. No unless you own such a large portion of the outstanding shares that you have a seat on the board of directors. You do not decide if profits are used to pay bonuses, higher compensation or dividends. Or, how much “good will” is payed if another company is purchased. Or, if bigger is better than more profitable.
When buying a stock you are only betting that someone will come along and pay you more than you payed for the stock.
My stock broker told me a year ago that I should be buying more stock because there was “5 billion ( or some other large number)on the sidelines just waiting to go into the market”. So I am thinking that despite the companies not making more profit the price of the shares were going to go up because all the gamblers were suddenly ready to put more chips on the table. I am fully aware that the price of some stocks are going to go up based on this money coming into the market. However, since I am a investor and not a gambler I am not sure that is a reason for me to invest.
I think the market as it exist today with its high PE ratio’s the focus on growth instead of profit and low returns in the form of dividends that it is much more of a gamble than an investment.
But, gambling it may be I would still like to hit the stock that doubles. I only wish my broker was serving drinks and wearing a short cocktail dress while I am gambleing.. I mean investing.
I’ve been a long term, buy and hold, dollar cost average investor for 14 years…but after the flash crash followed by the Aug drop, followed by the double dip hysteria in Sep I couldn’t take anymore and for the first time since I started buying mutual funds I put everything in cash.
I’m still deciding when, if, and how I want to go back to investing.
Yes, it bothers me to watch the market swing 7% (yet again) in less than 60 days. What economic data has changed in that period of time that could justify another swing of that magnitude?
Housing foreclosures, the EU debt crisis, 9.6% unemployment, the Fed pushing QE, uncertainty with the 2011 tax rates? All these issues are still sitting where they were two months ago…but the market now sees everything is fine, there is money to be made, come on back and enjoy the “new normal”.
I entered the market in 1996 and a few years later went through the bursting of the tech bubble. I dollar cost averaged through three years of cumulative negative returns and came out the other side not too bad so I became a true believer in DCA. To me that validated the whole concept of DCA investing.
But that fundamental belief has been shaken to the core over the last two years.
The 2008 crash wiped out all our market gains, all the employer matching, and cut into my actual 401K contributions. I held the course and continued to DCA and 2009 restored my contributions and employer matching but only a fraction of the previous gains.
I’m 52 years old and my 12 year average annual return in 2008 of 10% has been knocked down to 3.7% in 2010 so, technically, I have not “lost money”. But is all this risk and volatility worth 3.7% per year?
The now feel the average investor is being played as a sap; nothing more than cannon fodder for these hedge funds and their computer systems to play with. Intrinsic stock value and long term horizons have given way to the easy money that can be made by computer systems that drop hundreds of thousands of transactions a second hoping to make a fraction of a penny per trade.
It makes me sick to listen to CNBC and the way financial professionals talk about hot trades and market swings…they’re in, they’re out…it’s up, it’s down…it’s a game to them and they are playing with other people’s money.
I do worry about my 401K not getting the maximum ROI in the years I have before retirement, but I’m worrying more at this point about another major setback and having to work my way out of yet another hole just to get back to even.
I have to agree with the columnist. Twenty years of investing in no load mutual funds, as well as, about 30 individual stocks have resulted in average annual returns of 10.2 %. My approach has been essentially a dollar cost average one. I’ve occasionally harvested gains to make larger purchases, such as home down payments, but have not sold in down markets. The writer who blames financial ruin on a single bank stock tanking, apparently is unaware that no more than about 4% of assets should be invested in any one stock. If you are fully invested in a diversified portfolio, you should do no worse than the country as a whole. If the country prospers, you will too. If it does not, we’ll all be in the same boat and go down together, at least financially.
Yes, “investing” in the stock market is more or less “gambling”. If you can’t afford to lose your money, then you shouldn’t be doing it.
And the stock market crash that occurred between October 2007 and February 2009 when the Dow Jones index took a 54% dive from about 14,000 to some 6,500 was certainly not for the faint of heart.
Yes, the market is recovering. But remember this. Nothing is certain, particularly the stock market.
And here’s something else to keep in mind. On the way down, the denominator is large and the numerator small…and on the way back up, it’s just the opposite. Therefore, it takes a lot longer to recover from a loss than it does to suffer one…especially when what you may be “investing” in takes 1 step backward for every 1-1/2 steps forward. That 7,500 dive we mentioned? Since the recovery denominator is 6,500, then it will take a 115% recovery to get back the 7,500 that the Dow lost. Yes, it was 54% rolling down the hill, but it will require 115% to get back up that same hill.
Only a lucky few actually make the stock market pay…and then only when those lucky few watch their investments every single day and every single hour that the market is trading.
When we listen carefully to “professional advisors”, we are often reminded of those who make money from selling their advice, not from using their advice.
And here’s a closing note. Even that old standby called real property turned out to be a loser this time around (for whatever reason, and there are many to be sure…usually because mortgage money dried up). Everything is a “gamble” these days it seems. And there are a lot of “advisors” just waiting in line to sell you their advice on how to do what they won’t (or can’t) do themselves.
Nobody can “predict” anything. If they could, they would be surefire millionaires…and they wouldn’t tell you how they do it either.
OKJack™Group™
Middle & Working Class Disabled American Veterans
We Paid the Dues that Aren’t Required!™
P.S. The stock market crash of 1929 was really the crash of 1929-32. Basically, the market (using the DJIA index as a measurement tool) dropped from about 400 to some 200 (say 50%). Then climbed to about 300 to recover 1/2 of its loss. That’s when the really “bad stuff” happened. The market fell to about 40. So, first it fell 50% and recovered 1/2 of that…after which it went down the tubes, by July 1932 having lost 90% of its October 1929 value.
The DJIA did not recover to 400 until 25 years later in 1954…after the Great Depression of 1929-39…though the Second World War of 1939-45…after the war was won…after the post-World War II boom began…and finally after the Korean War had been brought to a close by President Eisenhower. Note: World War II was the last war in which a president requested and congress passed a Constitutional declaration of war. President Truman committed The Best and Finest of Us™ based on a U.N. Resolution alone. As far as we can tell, Mr. Truman didn’t ask congress for a Constitutional declaration of war…nor even for what presidents Johnson, Reagan, Bush 41, Clinton and Bush 43 sometimes used as their authority for committing America’s Soldiers, Marines, Sailors & Airmen to ground wars (usually counterinsurgencies) in SE Asia, SW Asia and elsewhere, i.e., congressional resolutions, e.g., the Gulf of Tonkin Resolution (1964) and the resolutions that led to the present counterinsurgencies in Afghanistan and Iraq (2001 and 2002, respectively).
Here’s an interesting comparison. The market fell by 7,500 points (using the DJIA index) from 14,000 to 6,500 between October 2007 and February 2009. It had its “ups” on the way down. Between February 2009 and December 2010, the market (so far) has climbed out of the depths to about 11,500. Therefore, the DJIA has recovered 5,000 points or roughly 2/3 of its 16-month loss.
Now then…is sometime shortly when the really “bad stuff” is going to happen? Who knows. Nobody knows.
The federal government has so far spent $Trillions to prop up the market and keep interest rates so artificially low that banks literally refuse to make home loans at those rates (unless a borrower can walk on water, and the property itself can float on air). Banks (especially small community banks) simply cannot (in their view) afford over the long-term to have loans in their portfolios at the present artificially low rates. So, they are waiting for rates to rise, while driving down the rates that they pay on demand deposits and time deposits.
So (using an illustrative example), is the stock market crash of 2009 really going to be the crash of 2012? And is it going to really crash this time, i.e., drop to say 3,500 (25% of its 2007 high of 14,000) or 30% of where it is now?
And in regard to federal government tax policy leading up to market crashes…we know that historically speaking, the top marginal federal income tax rate was a very low 25% in the Coolidge/Hoover years leading up to the crash of 1929 (actually the crash of 1932).
Likewise, the top rate was a low 35% in the Bush/Cheney years preceding the crash of 2009.
After the crash of 1932 (1929), however, the top rate was raised by successive presidents and congresses to as high as 94% during World War II.
And the top rate was “managed high” (e.g., 91%) between 1946 and 1963. And even after that, the top rate stayed at its historical average of 70% between 1965 and 1981.
Beginning in 1982, the top marginal rate began to be “managed down” (unnecessarily and even irresponsibly in our view)…first down to 50% and then way down to 28% in 1988 (just 3% more than during the Coolidge/Hoover years).
At the same time, the bottom marginal rate was raised from 0% to 15%).
The top rate stayed at 28% only momentarily (1988-90)…but was thereafter “managed low” to 28%-31% (Bush 41 years); 39.6% (Clinton years), the highest of the low, when some 23 million jobs (net) were created and the budget was said to be balanced; 35% (Bush 43/Obama years).
In our view, here are a couple of very serious questions that the middle and working class voting electorate will have to mull over between now and 2012:
1) Shouldn’t the top marginal rate be “managed up” to its historical average of 70%…while also lowering the threshold for that rate to say, $250,000 ($350,000 would be better from our point of view)? After all, somebody has to pay America’s bills in order to eliminate $Trillion deficits…while also paying down the U.S. Public Debt of some $15 Trillion. The middle and working class are simply tapped out.
2) Shouldn’t the bottom marginal rate be “managed low”, i.e., at its present historical average of 10%…while also raising the 10% threshold to at least $250,000 from its presence useless $16,750 ($350,000 would be better in our view)? After all, it is the middle class that creates businesses, jobs and national wealth (75%-80% of it)…not the wealthy class (although there are untold numbers of middle and working class voters who are still being convinced by the wealthy class to join them in denial on this score). As a matter of fact, economic reality in the United States has more or less “flipped”. Large corporations have gone global…and in the process have taken 75%-80% of their jobs overseas where 75%-80% of their products’ markets and consumers reside. So, 75%-80% of America’s economic burden falls on the middle class. Therefore, logic, reason and common sense say that it is the middle class that should have the tax incentives—not the wealthy class. Unfortunately, a U.S. Public Debt of $15 Trillion tells America that the old (and basically bogus) ideas of the Reagan years die hard (and expensively) in the minds of the middle and working class voting electorate (particularly the sliver of swing voters who recently disrupted congress yet once again by swinging control of the House back to the republicans in midstream). This kind of disruption simply breeds even worse gridlock.
Never been in stocks CDs all the way for 20 years. House paid off 1.5m in the bank and friends who followed advice like yours lost it all. The market is gambling. I understand it is supposed to be based on company valuations but it is not. Not when credit default swaps and horrible lending practices by churn and burn mortgage brokers can bring down all sectors. AIG put all there chips on the table which was bad enough but a lot of taxpayer money went with it to. Thrown in madoff and the house has always been stacked against you. Would be lol as I rake in 15,000 a year of interest vs friends who lost a good chunk but the market destroyed a lot of lives of good people and you sir are just spewing more of the same.
Never Been in Stocks, I respect the fact that you developed a plan, had the discipline to stick with it, and it worked for you. You are to be genuinely commended. But to be fair, I would suggest your friends didn’t follow the advice I provide in my articles or they would have been fine.
There are complexities to investing that tend to get generalized in these few words. The data show how the majority of people take the wrong actions at the wrong times with their investments. These studies indicate how average people destroy potential gains through their own mismanagement of their accounts usually due to emotional decisions; not due to outside economic issues. I try to help people understand the actions that cause their problems and implement strategies that busy people can manage without having to become expert investment analysts.
While your way worked for you, it is not the automatic, 100% solution. Even your seemingly simple conservative plan is complex. Your plan required the balance of time (how many decades?), the amount you saved, how you saved, the interest rate environment, and your standard of living, then and now. I’ve met plenty of people who followed your strategy and failed because their returns didn’t keep up with the taxes and inflation. Or they didn’t save enough to compensate for low returns. Or they didn’t maintain a low enough standard of living over the working life time. Or they run out of money in retirement. Being too conservative can be one of the most risky plans an investor can execute when planning over decades.
It’s pure speculation at this point but I wonder how much more you could have accumulated or how much more income you could generate with a well planned strategy that included a mix of investments with some having higher long-term returns. Thanks for sharing and explaining how discipline and diligence work to secure a financial future even with a conservative game plan.