Is Investing In Stocks Like Gambling? Several times in my short career as an economics professor, I have had someone tell me that investing in the stock market is morally questionable because “it’s like gambling. Certainly the unusual volatility we have seen in the stock market over the last several years has, like a lottery, enriched some and impoverished others. But is buying a share of stock like buying a lottery ticket? Gambling and stock market investing both involve risk-taking, but this does not equate the two. Gambling is consumption — it is done for the entertainment value of taking a risk.
Stock market investing contributes to production — it is the taking on of risk as part of providing a valuable service. Because gambling is consumption, a gambler can expect to lose money, on average. Now, we cannot say that gambling is wrong because it is entertaining, nor can we say that it is wrong because it is risky. What seems like random movements or the product of mass psychology actually has a rational economic explanation. This may be difficult to believe, given the rapid changes in the value of, say, Internet stocks in the last five or six years. First they increased at a rapid pace, even for a few firms that could not show a profit. E ratios — the ratio of stock price to actual earnings — began to rise to stratospheric levels. Then, as though stockholders had suddenly and simultaneously lost their trust in these firms, the prices began to fall.
Stocks are generally traded for two reasons. The first is that each individual’s investment goals will change over time, and each person will want to change his portfolio to reflect his tolerance for risk, need for income, or liquidity. The second reason is that the person selling the stock has a lower view of the firm’s prospects than the buyer. Market Speculators Speculation in the stock market — buying now in anticipation of selling at higher prices later — is valuable and completely moral. Firms that discover ways of being more productive will be recognized by stock-market speculators, and their stock prices will rise to reflect the higher market value of the firm. Does everyone who invests in the stock market have this ability to judge, this skill in evaluating the future prospects of firms? However, over time, those with poorer judgment tend to lose money and be discouraged from future investment. Those with exceptional abilities may “rent” their skills to others for a fee — leading to a class of professional investors who handle funds for the less capable. As we have seen, investment in stocks provides us with valuable information — a constantly changing market assessment of the values of corporations.
This should not be confused with gambling simply because of the risk involved. Instead, we should appreciate participants in this market as future-oriented contributors to long-term economic growth. He is assistant editor of the Quarterly Journal of Austrian Economics and is an Associated Scholar with the Mises Institute. We’ve detected you are on Internet Explorer. This copy is for your personal, non-commercial use only. June 2009 inception, versus negative 19. 30 million, likes what he calls OUCH stocks—out-of-fashion, undiscovered, or underfollowed, cheap, and hated. Late last fall, that described a lot of casino issues, as investors grew nervous about the industry’s leverage. Kravetz, based in Boston, believes that despite this year’s revival in gambling shares, the group has more room to run.
Barron’s: How is the market treating you this year? Shawn Kravetz: We’re off to a very strong start. We are extremely bullish about the single-stock opportunities. You turned bullish on casinos in December. Casino stocks around the globe, from regionals to Las Vegas to Macau and the rest of the world, enjoyed a pretty fantastic 2017 and most of 2018. They crashed in the period from October to December on concerns about highly levered businesses and the slowing of consumer demand. Aren’t you concerned about renewals of the Macau casino concessions in coming years? For that reason, and also because valuations aren’t wildly attractive, we haven’t jumped into operators that are meaningfully exposed to Macau, such as Las Vegas Sands or Wynn Resorts . We were seeing other attractive stocks.