The Stock market as a whole is a very broad subject but in its basic form, it is rather simple in nature. The process is comparable to how the Casino is structured. Although the Casino and the Stock Market are two irrelevant platforms, they both have one definite commonality which is high risks. If you look more closely, there’s a very close resemblance between the two in many ways. In this post, I’ll quickly analyze the Stock market versus the Casino; and finally, briefly talk about the Investment alternatives.
Risk-factor
While certainly none of either the two (Casino or the Stock market) can be considered risk averse, they’re very similar in a lot of ways. The Casino is far from being considered as an Investment, but the game itself is speculative in its very nature. Likewise, the same terminology is what the investment professionals uses when it comes to Stock picking. Everyone who plays Casino either for leisure or profit is in high hopes and expectations that he/she will hit the big jackpot. Conversely, in the Stock market, investors or speculators are also in hopes that the stock they purchased today will be purchased in a later date at a much price (or premium).
Between the two, you either win or lose; there’s no in-between. In the Stock market, the only time that you can break-even is when you sell the stock at a price that will cover your original investment. This amount includes the price “gain” or profit less the total amount of fees that you paid for. The probability that you will break even in the Stock market is very rare.
The Game
In Casino, there’s poker, black jack, craps, roulettes, slot machines, etc. On the other hand, the Stock market includes purchasing of individual stocks, options, foreign exchange, mutual funds, etc. The rules that governs each games are somewhat different, but each one is a derived form of another made to accomplish the same objective.
Any individual who just jumps in the game without any knowledge whatsoever is pretty much just throwing their money away. If that’s case, you’d be better of donating that money to charity since its tax deductible. If the so called “professionals” have a hard time beating the game, what chance do you have against it?
You versus them
When you’re playing in Casino, you are betting against the dealer which is backed up by its multi-million dollar franchise. Not to mention the game itself, the odds are very much against you. In the Stock market, you are betting against everyone which includes the company, shareholders, prospective buyers and sellers, and the multi-billion dollar funds institutions.
Investing or Speculation?
A lot of individuals may argue that their Stock holdings are in the form of investment, not speculative like I have addressed it. An individual can certainly minimize their risk in the Stock market through a diverse portfolio or mutual funds, but risks can never be eliminated. A Stock can only be considered as an investment if dividends are present since you earn a return. All things aside, the investment that you make is still considered speculative since you’re betting with hopes and expectations that the company will prosper. A company’s balance sheet doesn’t mean anything these days; look at Enron. You might say, “…but this is totally different. This XYZ company is solid and has full of integrity.” Unless you’re an insider or a top executive of the company, you have no idea!
If mutual funds and the likes are “safe” investment vehicles, why do you think bonds, CDs, money market, savings and the likes exists? Why would individual in their right mind settle for such pathetic returns? Unfortunately, settling for a low return Investment (currently 1.5% with ING) account such as savings only regresses you financially since the standard of living stands at 3%. While the banks are busy filling up their pockets with gained interest from using your money as high-interest loans, you on the other hand is suffering. Any investment other than bonds, CDs, and savings with low returns (ROI) are speculative in nature. In the end, I find little distinction between investing and speculation (if at all) as both depicts similar motives and apprehensions. It’s either you stand still and be conservative, or take some risks in order to become prosperous.
The mutual funds, individual stocks, options and the likes pretty much falls in the same category; just different levels of risks involved. It is safe to assume that an Index funds (referred to as mutual funds) are safer because it is diversified. In case of disastrous downshift in an industry, the entire holding doesn’t fall altogether as oppose to individual stocks. Take note of the word industry; but what happens when the whole stock market crashes? There are numerous amounts of recorded historical data that supports such a phenomenon. The recorded events dates back to the late 1920’s, 80’s, 90’s; not just in the United States but as well as the other parts of the world.
Some Historical Figures
They say, “those who do not learn from history are bound to repeat it.” Often, the Stock market gets praises from pundits as how the Stock Market averages a 10% return per 10-year averages. To an extent, there’s some truth in it but, and this also depends on what decade you are looking at. The chart below (taken from Yahoo!) illustrates several decades spanning from 1935-1992. As promising as the chart might seem, can your Investment advisor actually look you straight in your eyes and guarantee you a 10% return on your portfolio? Not to mention the additional fees just to manage your account.
As high as the 10.5% return may sound, you have to keep in mind that this is an average of multiple decades. In respect to long-term growth, the return is decently enticing and acceptable even to the savviest investor. What happens if your supposedly-glorious-and-prosperous-decade ends up with a retirement-stomping Stock market crash? I’m just hoping that people within their retirement age have another form of funds to rely on aside from Stocks such as 401K or savings.
Law of Gravity
Some people also feels strongly about the real estate market and believes that their property only gains equity over time. Real estate property values has certainly grown substantially and have kept up relative with the economy. With that in mind, there’s a common misconception in our society that real estate properties only gains value over time. A lot of people are under the false illusion that the real estate values are only bound to go up and never go down. As we all know, nothing goes up infinitely (at least not in the Stock market or Real Estate) as everything is bound to correct itself.
A given Stock or Real estate property’s value is measured in terms of how much consumers values it and their willingness to pay for it. This brings in the supply and demand theory, which buyers and sellers agrees on the price point. The “bubbling” as how a lot of people refer to is the overvaluation of a given Investment. Since there’s no definite value, the value can go only high as the eager consumers will allow. Over inflated stock prices and real estate properties in one way or another falls back to its actual price. As disastrous as this all may seem, this is a natural occurrence and should have already been anticipated by many.