Is Stock Market = Gambling? Let’s look at the data.

This month it will be 3 years since I kick-started my investment journey into the US public markets. I started off as a naive wide-eyed wannabe investor ready to buy hot “tip” penny stock and on my way to get that Ferrari.

I’ve been humbled by the markets, it has taught me a lot about different businesses, how to cope with losses, live with uncertainty, managing risk and more importantly through investing I learned a lot about myself.

One of the most important misconceptions I had about the stock market was that it is a casino. People who invest in the markets are gambling away their money. WRONG!

The best casino “gambling” game, the one with the best odds for you, is blackjack. The chance of house winning a blackjack hand is 51% and your chance of winning is 49%. Playing blackjack justifies the word “gambling”, you place a bet knowing that you will only win 49% of the time. However, the same can’t be said of the stock market. The odds of getting a positive return on your money is much higher if you place a “bet” in a low-cost index fund compared to placing a bet in blackjack.

Let’s look at the data.

I follow US and Indian markets so I’ll be looking at data for those two markets below:

Data Collection: I downloaded monthly data from investing.com for US broad market index(SP500) and Indian broad market(Nifty50). Indian data goes back to 1995 and US data all the way back to 1970.

I calculated rolling monthly, yearly, 3 years, 5 years and 10 years returns. Here are my findings:

If you bought and sold a low-cost index fund like SPY within a month, there is a 60% chance that you would make a positive return on your money. 60% is more than 49% that blackjack offers! But you can significantly increase your odds of positive returns if you hold it for more than a year. There is about a 94% chance you would make positive returns if you buy and hold for 10 years or more. Following, shows odds of positive returns for holding for different time frames:

Similar results can be observed for Indian markets. Infact, if you hold for 10 years or more, you have 100% chance of positive return on your money.

There you go. Even the worst odds offered by stock markets are better than the best casino game. Data suggests that investing in stock market is not equal to gambling.

P.S: You can find raw data and calculations here.

This information is just for educational and entertainment purposes. Please find my disclosures related to finance articles here.

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