Investing vs. Gambling

Senior Portfolio Manager James McFarland fills in for CIO Chris Perras and explores the differences between gambling and investing on the 4/18/2019 edition of Stock Talk

James McFarland: Good afternoon, everyone, this is not Chris Perras, Chief Investment Officer of Oak Harvest Financial Group, this is instead James McFarland, senior portfolio manager and head of trading period Oak harvest. Chris is taking a very well-deserved break this week, so I’ll be filling in today on the April 18th, 2019 edition of Stock Talk: Keeping you connected to your money.

Each week here on Stock Talk, we share with you our views in the market, what we see happening now and what we see coming down the pipe for the economy in the markets. We also focus on education, sharing with you what we’ve learned about how the stock and bond markets work. I’m recording this on 04/18 at 9:30am Central time. Since Chris is on vacation, I thought we’d really focus in on the educational aspect and talk about something a little bit different.

For this week, I’d like to take a couple of minutes and address one of the more common questions we’ve heard from folks regarding investing. I think this is something really basic, really fundamental. If you have a good grasp of what we talked about today, I think you’re setting yourself up to have a much better long-term investing experience.

Before jumping into our main topic for the week, let’s take a look at what’s happening out in the markets, this week is of course Easter week, which means it is a shortened trading week, the markets are closed for Good Friday. Given that it’s a short trading week, we didn’t really expect to see any huge moves in either direction on the whole, and that is in fact what’s happening.

As of the time of recording, the S&P is down for the week just about 0.3%, and that’s after rising about 3.5% over the last three weeks. Again, not a whole lot of movement in the shortened week. We did have a couple of notable earnings releases this week, Pepsi reported topping expectations and maintaining their full year guidance, and we believe we’ll continue to see that stock perform well.

Morgan Stanley also reported exceeding expectations and shares of Morgan Stanley are up about 3% for the week, this ties into our general outlook for the financial sector, which we do expect to be a strong performing sector in the second half of the year, and we will be positioning our equity portfolio based on our view over the coming weeks.

If you’ve read our First Half Outlook for 2019, you know that we do expect the recent upward momentum in the market to wane as we head into the second quarter. For the markets to undergo at least one more pullback. However, our outlook for the rest of the year is, by contrast, very bullish. We think a lot of folks out there are under estimating the potential in the market, and so we’ll be looking at any pullbacks we may get as buying opportunities.

In fact, we think we could be setting up for one of the better opportunities to put new money to work in the markets for all of 2019. If you have capital available, but may have been on the fence about investing or working with a professional, give us a call, or send us an email and let’s talk about it. Our number is 281-822-1350, you’ll find all of our contact information on our website, oakharvestfg.com, FG as in Financial Group.

What is the question we’re going to look at today? Well, imagine that you an investor with a well diversified portfolio focused on long-term results or at a summer barbecue or a family gathering or something, and you started chatting about your portfolio in the markets with a group of people and everyone’s having a good time talking about the market, talking about your portfolio, but then someone asks the question, “Hey, you know at the end of the day, isn’t investing just gambling? Aren’t you just throwing your money to chance, just like at a casino?”

Now, of course, your immediate reaction is probably just to say, “No, of course not.” Later, you start thinking about it and you start to wonder, are investing and gambling just the same thing? Are they really different? If they are, what makes them different? Well, that’s exactly what we’re going to chat about today, because no, done properly, investing is not just another form of gambling.

At the end of our show today, hopefully, you’ll be well equipped and confident to understand why that is and you’ll feel more confident as a long-term investor. Let’s jump into it. First and foremost, let’s make note of the fact that there is one characteristic that gambling and investing do indeed share, and that is taking on risk. Investing does involve risk, and of course, so is gambling, but I don’t think that the pure fact of risk taking is what people are talking about when they say that investing is the same as gambling.

Say the word “investing” and people can get this image of investors and traders throwing money wildly around with huge sudden wins followed by even bigger losses. It’s an image the media has helped to cultivate, think about some of the most famous investing movies like Wall Street or The Big Short, lots of guys in nice suits, doing dangerous and foolish things with money, and that’s what you get in gambling, right? Except maybe without the suits.

I think that’s the image that people have in mind when they say that investing is just like gambling. Well, let’s go over a few reasons why this is wrong, and there are at least three big ones. First, there are the odds, in gambling, the odds are not in your favor, everyone probably knows that. The saying, “The house always wins,” is there for a reason.

Now, sure, a gambler might get lucky for a hand or to a blackjack or a few spins of the wheel, and that may feel amazing, but when you go to the casino and start gambling, the longer you stay, and the more times you keep betting, the more likely you are to lose, the house has a built in edge over the gambler, there is a negative expected return to gamblers both on average and over the long run, that’s why the house always wins.

On the other hand, investing in the stock market is the exact opposite, investing in the stock market carries with it a positive expected return, both on average and over the long run. With the stock market, the longer you stay invested, the better your odds are of earning a positive return. Now, there are definitely periods of drawdown or negative performance in the stock market, but the long-term expectation is of growth.

Now, sure, if you behave like a gambler, trying to day trade in and out of stocks in the hopes of hitting the big one, yes, in that case, the odds are against you, and you’ll probably lose money. We’re not talking about day trading, we’re talking about investing, making considered long-term purchases in a diversified set of stocks, bonds and other asset classes, do that and there’s an expectation of positive return, exactly the opposite of what you have in gambling.

Second, how about the activity itself? When you gamble, what are you doing? Well, you’re playing a game of chance of some sort. When you gamble, you’re putting money up, but you’re not buying anything, you own nothing. In contrast, when you invest, you’re buying a share or shares of companies, maybe via different kinds of vehicles, it might be mutual funds, it might be ETFs, but ultimately, at the end of the day, you’re becoming an owner of a small piece of the company’s business.

If the company is profitable, you benefit in the form of an increase in the price of the shares that you own, and some companies pay out a portion of their revenue to shareholders directly in the form of dividends. Company management is actually paying you for taking on the risk of owning shares in the company, and that’s one reason that we on the investment team here at Oak Harvest focus the vast majority of our attention on stocks that pay dividends over those that don’t.

Third, and lastly, there is the possibility of total loss prevention in investing. When you gamble, say you make a bet on a sports game, once you’ve made the bet, you typically have no way to limit your loss if the outcome doesn’t go your way. If you lose, you lose 100% of the capital you’ve risked. In other words, if you risk $10 in the office NFL pool and lose your $10 is gone, but investing is different.

As investors we have a variety of tools available to us to mitigate risk and to prevent the total loss of capital. If you bet $100 on the Super bowl and you’re wrong, you lose $100, but say for example, you buy a stock, and it declines by 10%, you can choose to sell the stock at that point and retain 90% of the capital you’d risked. Investing has ways to prevent the total loss of risk capital whereas gambling usually does not.

We believe that risk mitigation is very important. In fact, we believe it’s so important that we’ve embedded what we believe are serious defensive measures directly into our investment process. Go to our website oakharvestfg.com under the Investment Management tab and read our piece called A Focus on Risk Management. We detail the three levels of risk mitigation that we use for all of our investment clients there.

Summing up, no, gambling and investing aren’t the same. I hope today’s show has helped explain why and how. Just in case there’s any doubt at Oak Harvest, we are investors, not gamblers. We focus on the long-term, tuning out the noise and using all of our skill and experience to focus on putting the odds in your favor, so that you can achieve what you want to achieve with your money.

That will bring us to the end of this week’s Stock Talk, Chris Perras, we’ll be back next week, bringing you his insight and analysis into the market based on his 25 years of investment management experience. If you enjoyed the show today, please share it with your friends and family. Go check at our website oakharvestfg.com, and have a look around. We’ve got a lot of great material up on topics like investing, retirement planning, even some good stuff on taxes and social security.

Read our piece up on the site, A Focus on Risk Management. Give us a call if you have any questions on how we manage risk, or we invest, or about your portfolio. If you haven’t taken that first step, but are wondering if now is the time to invest, call us and talk to us, and we will see if we can help you get started the right way. Our number is 281-822-1350 and we’re always happy to talk to you. Once again, this has been James McFarland, this has been Stock Talk. Have a wonderful Easter. I’ll talk to you again soon.

Speaker: The proceeding content expresses the views of the speaker, and it’s for informational purposes only. It is based on information believed to be reliable when created, but any-sided data, statistics and sources are not guaranteed. Content ideas and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Investing involves the risk of loss and past performance does not guarantee results.