My eyes were caught by a headline in a business paper yesterday. It said, “Steady rise in shady deals, price rigging”.
At first I thought this was an article on the real estate sector in India. But then as I read it further, things really started to look ‘shady’.
The article talked about how data from the stock market regulator SEBI suggests that the cases of market manipulation and price rigging in stock markets have steadily increased over the past few years.
In fact, such cases now account for almost 50% of the cases taken up for investigation by the SEBI.
What this data simply means is that a growing number of people in the Indian stock markets are following the mantra ‘Greed is Good’ as was said by the character of Gordon Gekko in the Hollywood classic Wall Street.
But is greed really good?
I still remember a time in late 2008 when a lot of retail investors I met, including some from within my family, suggested me that the stock market was a casino only reserved for the lucky and wealthy few.
Ironically, these very people were playing this casino till a few months ago (around January 2008) when the markets were acting like a drug addict on a high.
The only different was that instead of slot machines, these people were betting on rising stock prices.
Since the game was there to be won, or so these people thought, they played and played this casino till the cops came, and the house came crashing down.
History is proof that such people, who play the casino called stock markets, ultimately lose it all. Because history is also proof that in the casino business, it’s the house (the casino) that always wins and not the gamblers.
The case with gamblers is that while they win for some days, one fine day they lose it all to the house.
This is exactly what happens to people who treat the stock market as a casino and gamble with the mindless hope of winning it all.
Let me remind them some lessons from the history of stock markets.
Once upon a time…
You see, the original design of the stock market was purely capitalist in intention.
The stock market was created to provide a means for business people – entrepreneurs, inventors, developers – to obtain needed investment capital, to start or to expand their businesses.
So stocks were issued, bankers and other investors bought the stock, and the businesses made use of the invested money. But once a business started flourishing and was producing a profit, it returned the money back to the stock holders so that it could be used by other enterprises.
Over the years however, this last part of the process was completely forgotten.
As years passed, the brokers quickly realized that they could make lots of easy money in trading shares back and forth. They became middlemen, in charge of the flow of capital, earning their commission on each and every transaction.
As we see now, the game is no longer about capital and businesses, and has become one where everything is centered on the flow of money from one investor to another, instead of one business to another.
And in this flow, while investors get doomed time and again, brokers always make money!
This is exactly like it happens in a casino. One gambler gets rich at the expense of others, but ultimately loses it all.
But whatever happens, the broker (the casino) always wins.
Stock market = Casino?
“So there’s no difference between the stock market and casino?” you may start to wonder.
Well, not much!
One difference is that slot machines are replaced by coloured and confusing graphs, and the loud ring of the jackpot alarm bells is replaced by scary headlines in business channels and newspapers.
But stock brokers earn their commissions from the flow of traffic, just as in the casinos.
Also, like in a casino, gamblers bring in lots of money and leave a portion of it behind (most often everything they came with), thinking that they had a really good time.
So, the money goes into the stock market casino, but one question never seems to get asked or answered: Where does all that money go?
When a stock crashes 50% or 80%, all investors and speculators lose their money. But where does this money go?
Of course these are paper losses, but a significant part of these are real gains for the brokers, who continue to make their bucks while everyone and his mother is selling stocks like crazy.
Coming back to the question whether the stock market resembles a casino, I’ve realized over the years that the question is deeper than it appears.
When I was asked this question a few years back, I used to reply, “No! Casinos are for gamblers and the stock market is for investors.”
However, what I’ve realized over these years is that there indeed are some similarities as well as differences (as we just discussed above) between the two.
The closest similarity between the two lies in the mindset of the players/gamblers.
Gamblers go to the casino hoping for the big win. We all hear about the person who went in poor and left the casino with millions. This seems an easy way to get rich.
What we fail to understand is the enormous odds against such a huge win. But we remain hopeful and optimistic, and so casinos thrive.
“I would be the next millionaire!” is what all gamblers think till the time they come out of the casino.
Unfortunately, the stock market has become like a casino for too many people, as the data from SEBI also suggests.
“Haven’t you heard about the guy who bought an unknown stock on a tip from his brother’s friend’s colleague and watched it turn into the next Infosys,” asked a friend. “I wish I was that guy!”
With such a thought, which most people in the stock market have, they buy a stock. Then they check the ticker every 10 minutes for the next month, just like the gambler watching the wheels turn on a slot machine, waiting for that “Yes, I’m the millionaire!” moment.
If it doesn’t pay off, they speculate on another stock, just like a gambler goes to another slot machine to try his luck.
However, the market does not operate exactly like a casino. It’s the gamblers who think it does.
In a casino, the longer you play, the more you will lose (remember, the house always wins!).
However, in the stock market, the longer you play, the more likely you are to win.
Of course you will hear stories of people who made a quick killing in the stock market, just as there have been people who left the casino with millions, but always remember this for a fact – these are exceptions, not the rule.
The rule is that you can create wealth from the stock market only by buying quality businesses and holding them over the long run.
So my answer to the question – Is stock market a casino? – isn’t “No! Casinos are for gamblers and the stock market is for investors.”
The answer is – “You must know the difference and not try to treat stock market like a casino.”
If you treat the stock market like a casino, you will be a loser in the long run.
And if you don’t, you’ll be a winner.
It’s entirely up to you.
Now tell me – Do you see the stock market as a casino, a place to make fast money? Share your view in the comments below or post on our Facebook page.