“Possibility” but not an “actuality” since share prices are typically based on the feelings of major investors and not necessarily what’s actually happening within a company.
Having a diversified portfolio has a positive expected return. Gambling has a negative expected return. There’s a long history of stock investing resulting in positive average returns, and there’s a long history of slots resulting in negative average returns.
If you’re buying good companies (or buying an index) and holding long-term, you are expected to get positive returns, therefore it’s not gambling. Any investment can have a negative return, it’s the mathematical expectation that separates it from gambling.
History is the wrong way to look at it. If I go to a roulette table and the last 10 balls have landed on red, that doesn’t change the odds that the next ball will end on red. Assuming the table and ball are fair, no amount of history will change the probability of the next ball landing on red, so there will always be a negative expected return for any bets placed on a roulette table.
Investment grade securities are different. Businesses are expected to return a profit to shareholders, otherwise they will eventually go bankrupt. So there is a built-in expectation of positive return, regardless of the pricing history of the security. Buy-and-hold investors should always expect a positive return on a diversified portfolio, because, on average, businesses are expected to return a profit. Valuations can certainly fluctuate in the short and medium term separate from profits (valuations include future expected returns), but since it’s not a zero-sum game, long-term returns are expected to be positive.
So no, 15-years is not enough, nor is any other arbitrary amount of time. Any expectation of future returns should be largely founded on the underlying fundamentals of whatever it is you’re buying, and then modified by past returns to adjust the probability of returns going forward.
Stock valuations are a poor proxy for actual value, they’re more a measure of market sentiment, which is why very short-term stock movements (esp. less than a year) are largely just gambling, because as A. Gary Shilling said:
Markets can remain irrational a lot longer than you and I can remain solvent.
So if you’re trading good securities (i.e. companies with positive expected return) on a short-term basis, you’re likely gambling, because you’re betting on changes in market sentiment. But if you’re trading good securities on a long-term basis, the underlying fundamentals should outpace short-term deviations from expected returns. My general number here is 10-years, but many financial experts go as low as 5-years in terms of investment horizon. The historical returns matter a lot less the shorter or longer your time horizon, and IMO are largely only important on medium terms (say, 5-15 years) because at that point we’re looking at more systematic over or under valuations (and tools like the Shiller CAPE do a decent job of indicating that).
It’s possible for the stock market only to grow because it externalizes costs (environmental damage, health of workers, etc.), and if that’s the case, we need to see if society is actually proceeding in a positive direction as a whole (I generally believe this to be the case), but consider for a moment that the economic windfall experienced by many western nations was (and still is in many ways, think banana plantations) largely made possible by the subjugation of imperialized nations. In this case, was the economic windfall experienced by the imperial powers and their trade partners actually a good for society as a tide that rose all boats, or not?
If we fail to consider the biggest losers of the stock market, those that cannot even necessarily participate, it becomes much closer to gambling at the very least. I’m not here to have an argument about whether or not capitalism and the stock market and such things are actually good or bad for society as a whole, just that it’s easy to ignore the biggest losers of the system by virtue of the fact that they don’t necessarily even invest in the first place. In this case, the universe is the casino, and humanity are the gamblers, as compared to just the stock market being the casino and the investors the gamblers.
Not that your comment is wrong necessarily just that there’s more ways of thinking about it.
It’s possible for the stock market only to grow because it externalizes costs
Sure, and ideally governments step in to return those costs to companies. For example, I think we’ve done an absolutely terrible job of managing climate change, and we’ve largely allowed companies to push those costs onto the people at large. That said, just because they are pushing off costs onto society at large doesn’t mean they’re a net negative, it just complicates the math a bit.
I’m a huge fan of Pigouvian taxes, and in the case of carbon emissions, that means carbon taxes (not credits or caps, but direct taxes based on carbon emissions). Those taxes should ideally equal the negative externalities of those companies, so if a competitor can reverse those externalities for less than it would cost the company to eliminate them, everyone wins (i.e. we now have two profitable companies). This has a two-fold impact:
encourages companies to produce fewer negative externalities
allows delay of expensive changes, with a short-term plan to compensate impacted individuals (or correct the externality, voter’s choice)
If we can put such a system in place, it makes it a lot easier to assess which companies are actually net positives for society.
People aren’t using Robinhood to invest in index funds via their 401k, they’re using it to “day trade” which is just gambling. Nobody is saying that investing = gambling, they’re saying that buying and selling shares or options in a single company in order to time the market = gambling.
Robinhood has IRAs, and you can totally buy diversified ETFs with it. When I used Robinhood for a few months, that’s basically what I did.
Options can be part of a legitimate strategy (e.g. my brother sells covered calls on dividend-yielding stocks, where the intent is to juice returns a little on a long position), but yes, most people who trade options are gambling.
My argument is that investing != gambling, and the difference is whether there’s a positive expected return. That’s a statistical question, not a “I am smarter than the next rube” question.
“Possibility” but not an “actuality” since share prices are typically based on the feelings of major investors and not necessarily what’s actually happening within a company.
Having a diversified portfolio has a positive expected return. Gambling has a negative expected return. There’s a long history of stock investing resulting in positive average returns, and there’s a long history of slots resulting in negative average returns.
If you’re buying good companies (or buying an index) and holding long-term, you are expected to get positive returns, therefore it’s not gambling. Any investment can have a negative return, it’s the mathematical expectation that separates it from gambling.
How long does an asset need a history of positive returns before it’s no longer “gambling”? Hypothetically, would 15 years be enough?
History is the wrong way to look at it. If I go to a roulette table and the last 10 balls have landed on red, that doesn’t change the odds that the next ball will end on red. Assuming the table and ball are fair, no amount of history will change the probability of the next ball landing on red, so there will always be a negative expected return for any bets placed on a roulette table.
Investment grade securities are different. Businesses are expected to return a profit to shareholders, otherwise they will eventually go bankrupt. So there is a built-in expectation of positive return, regardless of the pricing history of the security. Buy-and-hold investors should always expect a positive return on a diversified portfolio, because, on average, businesses are expected to return a profit. Valuations can certainly fluctuate in the short and medium term separate from profits (valuations include future expected returns), but since it’s not a zero-sum game, long-term returns are expected to be positive.
So no, 15-years is not enough, nor is any other arbitrary amount of time. Any expectation of future returns should be largely founded on the underlying fundamentals of whatever it is you’re buying, and then modified by past returns to adjust the probability of returns going forward.
Stock valuations are a poor proxy for actual value, they’re more a measure of market sentiment, which is why very short-term stock movements (esp. less than a year) are largely just gambling, because as A. Gary Shilling said:
So if you’re trading good securities (i.e. companies with positive expected return) on a short-term basis, you’re likely gambling, because you’re betting on changes in market sentiment. But if you’re trading good securities on a long-term basis, the underlying fundamentals should outpace short-term deviations from expected returns. My general number here is 10-years, but many financial experts go as low as 5-years in terms of investment horizon. The historical returns matter a lot less the shorter or longer your time horizon, and IMO are largely only important on medium terms (say, 5-15 years) because at that point we’re looking at more systematic over or under valuations (and tools like the Shiller CAPE do a decent job of indicating that).
It’s possible for the stock market only to grow because it externalizes costs (environmental damage, health of workers, etc.), and if that’s the case, we need to see if society is actually proceeding in a positive direction as a whole (I generally believe this to be the case), but consider for a moment that the economic windfall experienced by many western nations was (and still is in many ways, think banana plantations) largely made possible by the subjugation of imperialized nations. In this case, was the economic windfall experienced by the imperial powers and their trade partners actually a good for society as a tide that rose all boats, or not?
If we fail to consider the biggest losers of the stock market, those that cannot even necessarily participate, it becomes much closer to gambling at the very least. I’m not here to have an argument about whether or not capitalism and the stock market and such things are actually good or bad for society as a whole, just that it’s easy to ignore the biggest losers of the system by virtue of the fact that they don’t necessarily even invest in the first place. In this case, the universe is the casino, and humanity are the gamblers, as compared to just the stock market being the casino and the investors the gamblers.
Not that your comment is wrong necessarily just that there’s more ways of thinking about it.
Sure, and ideally governments step in to return those costs to companies. For example, I think we’ve done an absolutely terrible job of managing climate change, and we’ve largely allowed companies to push those costs onto the people at large. That said, just because they are pushing off costs onto society at large doesn’t mean they’re a net negative, it just complicates the math a bit.
I’m a huge fan of Pigouvian taxes, and in the case of carbon emissions, that means carbon taxes (not credits or caps, but direct taxes based on carbon emissions). Those taxes should ideally equal the negative externalities of those companies, so if a competitor can reverse those externalities for less than it would cost the company to eliminate them, everyone wins (i.e. we now have two profitable companies). This has a two-fold impact:
If we can put such a system in place, it makes it a lot easier to assess which companies are actually net positives for society.
People aren’t using Robinhood to invest in index funds via their 401k, they’re using it to “day trade” which is just gambling. Nobody is saying that investing = gambling, they’re saying that buying and selling shares or options in a single company in order to time the market = gambling.
Robinhood has IRAs, and you can totally buy diversified ETFs with it. When I used Robinhood for a few months, that’s basically what I did.
Options can be part of a legitimate strategy (e.g. my brother sells covered calls on dividend-yielding stocks, where the intent is to juice returns a little on a long position), but yes, most people who trade options are gambling.
My argument is that investing != gambling, and the difference is whether there’s a positive expected return. That’s a statistical question, not a “I am smarter than the next rube” question.