February 16, 2011
By Staff Reporter
The value of my portfolio has dropped in the past few months. Right now, I feel the stock market is just a big gamble. What do you say?
— A.M., Manhattan
By Pat Duffy
Those sentiments expressed to me a few times in recent weeks perhaps summarize the thinking of a significant number of investors at the present time.
The drop in the stock market was not totally unexpected. What was totally unexpected was the actual time when it would happen. The stock market, by its very nature, cannot simply keep going up. But so many investors today have only seen it go up and think, perhaps unconsciously, that it always will be so.
When I am engaged in client education, I stress a few facts about investing. There are, I tell clients, two certainties about the stock market. First, it will go down. Second, you never know when. I suggest to them that that if they can accept these two facts, they might consider investing in the stock market.
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But back to the question of whether or not the stock market is a gamble. I would argue that it is not. There are significant differences between the stock market and events we usually call gambling, like horse racing, the lottery, slot machines.
In each of these cases, it is all or nothing. You usually get something back or you lose everything. Often it is a case of high risk, high return. In a horse or greyhound race, you know the result very quickly. Michael O Muircheartaigh, the well known Irish sports commentator, once described a greyhound race as "twenty nine seconds of ecstacy." It is over that quickly. The stock market goes on a lot longer than that.
Once the slot machine starts spinning, it will continue until it stops. But you cannot stop it and take your money back. The same applies to a horse race. Ever seen a bookie give money back in the middle of a race? But in the case of the stock market, you can withdraw your stock money at any time. You can get out with a partial gain or a partial loss. You cannot do that in the case of the lottery.
Time is the key
Investing returns are gained over time. If in doubt, get a graph of the stock market from 1920 onwards. You will see that the overall trend of the graph is decidedly upward. You will also notice that the graph goes down a few times. And on a few occasions it went down a lot. But the overall trend is up.
Another very important difference between gambling and the stock market is the fact that gambling — buying a lottery ticket, placing money in a slot machine or even putting a bet on your favorite horse — does not entail any real work. Investing does. To be a good investor, you need to educate yourself. This may mean reading, or attending courses. It does take time to educate yourself. And, remember that education is not simply information. It is an understanding of knowledge.
Good investors have patience and discipline. First of all, they know what they are getting into. Secondly, they know they will never win ’em all. Thirdly, they are able to accept the uncertainties of life. This third aspect of investing is tied in with hope, the belief that the future will be good.
At the present time, many investors are probably dying to have somebody tell them what to do, maybe to get out of the market. But a fundamental rock principle of investing in the stock market is that it is more important to be in the stock market when it goes up than out of the stock market when it goes down. If you are worried, simply ask yourself which you are more annoyed at, the stock market itself or your own investments. There is a good chance your answer is the stock market.