Is an Unpredictable Stock Market Scary?

I’m sure it can feel that way, but the good news is that the math is on your side.

Ever see those John Stossel reports where he shows that stock market “experts” do no better than picking stocks at random?

I’m here to tell you it is all true – more than most people realize. Random stock picking is statistically just as good as having an expert pick stocks. This is not a new discovery. The first study on this subject was back in 1932, and since that time it has been confirmed repeatedly.

And it is not just stocks. Studies have also shown that most other investments – bonds, commodities, real estate, options – behave in this way as well.

Is that troubling? If it is all random, it sure makes the stock market feel like a “casino.” Why put your money on something that bounces around at random?

Think of it as owning the casino

Nobody likes to think of investing in stocks as gambling. Well, it is somewhat like gambling, but if you have a properly diversified portfolio it is more akin to owning the casino rather than playing in the casino. For example, the results of a single game of slots or roulette is essentially random, but the game is rigged so that, over time, the math is against the players and with the casino. There can be times when the casino comes out behind, but the longer it operates, the longer time there is for the math to average out in favor of the casino owners and against the casino players. The same is true with owning a diversified portfolio in the stock market.

It is ok to imagine Vegas when thinking about investing – but just imagine you are the casino owner rather than a visiting gambler.

Photo by benketaro