In over 15 years of working with investors, I have noticed a disturbing trend. There is much more focus on trading tactics and financial products than on results (i.e., inputs vs. outcomes). Lately, this has gotten worse with the ease of placing trades. Many people now engage in short-term “bets,” hoping for a quick win. In other words, they’re gambling, not investing.
For example, some investors are using 0DTE (zero days to expiration options) in their investment strategy. 0DTE options expire the same day they are issued, allowing you to place a bet on the direction of the market that day. They have risen in popularity and are now being packaged into products like ETFs that are marketed to individual investors. For most investors, these products are the newest way to use the stock market to gamble and are often a losing bet.
I’m not here to judge, but as a financial advisor, I would like to give you some perspective. If you have disposable income and want to play the markets, much like the games at a casino, that’s entirely up to you. However, it is crucial to remember that, more often than not, the house comes out on top.
Gambling
Gambling can be defined as the practice of risking money or other stakes in a game or bet.
People gamble because it is fun.
Whether sports betting or options betting, we study, form an opinion, and then feel the rush of placing the bet. We tell whoever is around why we are right, text friends to explain our genius thought process, then lean forward and watch what unfolds with adrenaline coursing through our veins. When our hypothesis proves correct, we win money and feel on top of the world. That is the rush we are seeking. However, slightly more than half of the time (if an excellent gambler), things don’t go our way, and we are left feeling dreadful.
Stock market betting is so easy we can’t stop ourselves from doing it. The problem is that most of these trades don’t end up with us accumulating more money. Who wins in these bets if the individual investor loses? As usual in the betting world, it is the house, and in this case, very large houses made of marble and mahogany that have stood for hundreds of years and will stand for hundreds more. At large, the house is Wall Street.
What Wall Street and casinos have in common is once they have you in their game, they control the odds. The best way to win is to not play. When you buy a zero-day option, and it expires worthless (the most likely outcome), the house wins. To make matters worse, asset management firms are now capitalizing on the trend by creating products to access 0DTE options. What problem these ETFs are solving I cannot figure out.
Investing
Investing, on the other hand, is committing money to earn a financial return.
In other words, people invest because they want to grow their wealth over the long term. So, if you wish to invest, not gamble, the goal is to “bet” on those who stand the best chance of winning over time.
At its core, the stock market is an exchange that trades shares of operating businesses. When indexing (investing in broad-based stock indices, like the S&P 500), we are betting on the collective ingenuity of the constituent companies’ products, services, and management teams to grow earnings, therefore creating more valuable companies. As the value of these companies grows, as owners, we get a return on our money.
Given the relative nature of investing (in that we must measure any investment we make against all other available options), any type of non-index investing is betting on the ingenuity of that strategy to be greater than the collective ingenuity of the index companies.
Another way to say it might be that when you engage in trading strategies, you are betting on your own ingenuity to be greater than that of Satya Nadella (CEO of Microsoft), Jensen Huang (Nvidia), Jamie Dimon (JP Morgan Chase), and Elon Musk (Tesla), combined (just to name a few). This is at the core of explaining chronic mutual fund underperformance.
Consider investing under this paradigm and see what changes you consider.
Playing Your Own Game
How can you invest and avoid Wall Street’s game, you may ask?
The answer is simple but not easy. You must work hard to change your mindset to the long-term approach I mentioned above and seek entertainment elsewhere. You see, as modern investors, we have been given a gift. That gift is called indexing, which gives us the ability to acquire diversified ownership stakes in the best companies in the world with the click of a button at almost no cost.
I get it; gambling is fun. What is more fun is winning.
For individual investors, Index fund investing has a chance of winning that trounces speculative trading. Therefore, I recommend building a plan for your finances that takes a hard look at where you are currently, envisions how you hope your life plays out, and devises a funding mechanism that gives you attractive odds of financing your future.
Then, once you are clear on how much current and future money you must set aside to accomplish your dreams and have a plan for doing so, feel free to gamble with whatever is left. That will give you the peace of mind that you are playing your game and no one else’s.
We encourage you to reach out to discuss how we can help.
