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| Pathways Advisory Group, Inc. Dustin J. Smith, CFP® |
Entering a casino, most people feel a sense of excitement about what might happen. It’s an electric feeling. Whether it’s craps, blackjack, poker or slot machines, everyone has a chance to win big. Once the winning starts, it seems contagious. The crowds grow quickly. On any given day, luck can get the better of the casino. I imagine they lose big certain days, months, maybe even particular years. At the end of the day, investing is a lot like gambling, but not in the way you think.
Investment results on a daily, monthly or annual basis are anybody’s guess. Returns are unpredictable and, at times, fickle. Markets will test your resolve. But, like the casino (not like the gambler), the odds play out in your favor over time. Investors, like the casino, have to accept the risk of short term losses. Investors, like the casino, accept this risk because of the odds. Investors, like the casino, have reason to remain calm. The house, like the patient investor, always wins!
The investor’s odds are driven by capital markets. Equity markets rise more often than they don’t. In most years, stocks outperform bonds. Value stocks typically outperform growth stocks. Highly profitable companies tend to outperform similar less profitable companies. And, when small stocks outperform large stocks, it’s not close. Good small company returns come in bulk. With a portfolio designed to capitalize on these factors of expected returns, the deck is stacked heavily in the investor’s favor. Daily, monthly and annual results will be noisy, just like casino profits, but the rewards will come with time. All it takes is (lots of) patience!
Speculation (trying to predict the market and capitalize on that prediction) is a lot like gambling. You may win big on occasion, but it’s only a matter of time until the odds catch up with you. Investing, with the kind of discipline and factor-based diversification described above, is a lot more like running a casino. For both the casino operator and the long-term investor, it’s only a matter of time until the profits pile up!
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