Saturday, July 31, 2010

Are you better off playing the Stock Market or a Casino?

By Tom Kando

There is a provocative article, “Ten Stock-Market Myths That Just Won’t Die” by Brett Arends in the July 25 edition of the Wall Street Journal. The myths include such cliches as (1)“This is a good time to invest in the stock market,” (2) “Stocks on average make you about 10% a year,” (3)“If you want to earn higher returns, you have to take more risk,” (4)“Stocks outperform over the long run,” and other ones.

I can strongly relate.

Take retirement plans: Over the past couple of decades, the proportion of defined benefits plans has declined sharply, increasingly replaced by defined contributions plans. The former are pension plans which guarantee the retiree a specific monthly benefit for the rest of his life (defined benefits). PERS, STERS and the other massive retirement systems covering California state employees and teachers are examples of this.

The latter are 401Ks, IRAs and other investment instruments. The only thing the member knows for sure is how much is taken out of his paycheck every month (defined contribution). As to his benefits, they will fluctuate, depending on the stock market. He may make a million, or lose his shirt.

The argument for replacing defined benefits with defined contributions is that the former are bankrupting the states and the companies (E.g. General Motors) which offer them. It is said that they made unsustainable promises, and that they are going broke.

By far the most important case in point is Social Security, which many people say is going to ruin the government within a few decades.

And the solution, we are told by Republicans, is to privatize it, i.e. to make Social Security into a defined contribution plan.

So the question is: If defined benefits plans and Social Security don’t work, how do privatization and defined contribution plans solve the problem?

I am told that it is better if I start gambling with my retirement savings. This will help me?

Arends’ article made me realize how many uncanny analogies there are between the Stock Market and a Las Vegas casino.

1. Take Stock Market myth #3, above: “If you want to earn higher returns, you have to take more risk.” The roulette table shows the absurdity of this advice, when taken to the extreme: Only a fool would put all his money on a single number, hoping to multiply his investment 36-fold. But isn’t this what many investment banks did in the recent financial collapse?

2. Take the other three Stock Market myths, above. They are all bullish, i.e. optimistic. The general idea is that on balance, investing in the Stock Market means winning, not losing.

This is not unlike the attitude of many casino customers: Have your friends ever told you how much they lost, after returning from Las Vegas? Typically, we brag to each other about the $500 or $1200 we made all of a sudden with a hand of black-jack or at a slot machine. We remember the one-time jackpot. In fact, anyone who frequents casinos regularly is down many thousands of dollars in the long run.

3. Do casinos work for anybody? Of course they do - for their owners. The Stock Market also works for some: Those who gamble with other people’s money, the brokers, the investment firms. For you and me, it works as well as a casino, especially if you play aggressively.

4. Your goal in the Stock Market should be the same as in a casino: forget winning. Just try to lose as little as possible.

I like to spend an occasional three-day weekend in Las Vegas. I enjoy the opulence of mega-hotels, buffets and shows. I gamble for maybe 15 minutes, putting down 1 or 2 dollars on a roulette table or into a slot machine. I usually end up losing $10 over the weekend. Anyone with a similar stock market record can consider himself wise and lucky.leave comment here