Is putting your money in the "market" investing or gambling?

[rhett o rick]

What happened to our economy? A number of things, many in the Bush years but also Clinton didn’t help by signing the bill that allowed the banks that you and I put our money in to “invest” (read gamble). So some will say that it’s just the “free market” at work, let the chips fall where they may. There are a couple of things wrong with that thinking. One, if I wanted someone to gamble with my money I’d go to Las Vegas myself. Two, we the taxpayers provide insurance to the gamblers (banksters). If they lose big, we make it up to them. Now remember it is our money they are gambling with and it is our money we give them when they fail. This may be win-win for the banksters but definitely lose-lose for the tax payers.

Another thing is that when stocks are bought in the market, we are not really “investing”. We are buying the stocks from another gambler that is betting the price will go down. We of course are betting the price will go up. Millions of these bets are made each day with virtually none of the money actually invested in companies to build factories or increase production.

We have seen plenty of evidence of how easy it is for the insiders to manipulate stock prices. For example, if an investment house strongly supports a stock, the popularity increases and so does the price. We, the general public are just trying to get in on the bubble. Now let’s say the investment company that is promoting the increase of the stock price, bets on the price falling (and or their favorite clients) and at some point stops supporting the stock, bingo, the price falls and the investment house (and or their favorite clients), make big money. One guess who loses. The poor bastards (you and me) that are just trying to make some money for retirement.

Goldman Sucks and others have done similar tricks with whole countries economies. In countries like Iceland, Ireland, and Greece they help make the countries’ economies look healthy, and then bet against the strength of the economy (they buy insurance against collapse). Of course they know the economies are over-stretched, because they helped put them in that position.

The banksters without regulations are manipulating our economy and making hundreds of billions and even trillions at our expense. We need tough regulations immediately.

I am sure that if an economist reads this they would cry, but it’s how I see it.

[dipsydoodle]

1. You missed out

waste disposal assuming you didn't actually want the money you maybe threw away.

[catnhatnh]

2. Putting your money into the market...

is like bending over to pick up the soap in a prison shower...AGAIN.

[liberalla]

3. I got out in 2005, and am not even tempted to go back.

I still feel the whole thing is rigged, and it's too dangerous to invest.

[mmonk]

4. With regulations=investing, without regulations=gambling.

Corporations are only concerned with quick dollars and the current stock price, not market stability.

[Statistical]

7. Why is market stability a good thing?

Volatility only affects short term gains.

If you time horizon is less than 5 years (you need the funds invested in <5 years) you shouldn't be invested in equities to begin with.

[mmonk]

11. You ask that while many investors approaching retirement lost their savings

and many retirement funds both private and public were sunk in the last downturn?

[Statistical]

13. They only lost if they sold at the bottom.

As of March 19th, 2009 (a week after the bottom) total return on DOW (capital gains + dividends) has been +1.3% annualized.

Now +1.3% isn't good but the point is that market recovers after every downturn. Always has, always will.

Three things
1) asset allocation is very important. Nobody should be 100% stocks anymore than someone should eat a diet of 100% chocolate.
2) Portfolio should get more conservative over time. Older you are and sooner you need the money less risk you should be exposed to
3) Never sell at the bottom.

Someone who sunk $10,000 into a fund that tracks the Down on March 19th, 1989 and then sold exactly 20 years later on March 19th, 2009 got $12,948. Had they waited till today they would have $18,127.

[rhett o rick]

16. Yes exactly, if only investors knew when the bottom and tops are we'd all be rich.

No actually that's not possible. For every sale there is a buy. Someone wins and someone loses. Usually it's the privileged class that wins.

[Statistical]

19. That assumes the game is zero sum.

If you and I bet on roll of dice whoever rolls higher wins that is zero sum game.

However in the equities market the underlying companies make profits and those profits are returned to shareholders. Thus the overall "game" is a positive sum game. Those profits add up to trillions of dollars a year. That is money flowing into the "game".

Now some make make more than others but the statistical "expectation" is a positive return over the long run. Looking at 20 year period there has NEVER not once (not even if you bought day before crash in 1929) been a 20 year period where overall market didn't have positive return.

It is possible (and probable) for both buyer and seller to make money over the long run.

[rhett o rick]

36. You keep saying "the overall market". What about the 95% of us that are in the game?

Of course the big boys make huge profits and when you average that in to "the overall market" it looks pretty good. But when the big boys make a haul, usually the little guys lose. In many ways it is a zero sum game.

[Statistical]

38. Not true. Please read what I posted.

If you took a chunk of money and put in a mutual fund that tracks the DOW and never touched it, never managed it, never even looked at it for 20 years there is no 20 year period where you lost money. It wouldn't matter if you started in 1928, 1978, or 1988. There simply is no 20 year period where you had a negative return. This is completely unmanaged investing. The stock market equivelent of putting your money in a shoebox and burying it in the backyard.

Not single 20 year period with negative return. Never. Not once. Not even a single penny. This is about the simplest form of investing know to man. The idea it is limited to "big boys" only is utterly silly. You (not the generally you but YOU specifically) could have done EXACTLY this 20, 30, 40 years ago. There is nothing the "big boys" could have done to stop you. You sell when you want to sell.

If can't compete in day trading against the "big boys" then ..... STOP DAY TRADING AGAINST THE BIG BOYS! :)

[mmonk]

30. And what is the value of our current currency vs 1989?

What is the purchasing power? I wasn't speaking in general terms as to market fluctuations, business cycles, and market corrections. I was talking about structure and that structure centered around rules of the game. When you change that, you can ruin 20 and 30 year horizons.

[Statistical]

32. That is not adjusted for inflation.

You can adjust for inflation by comparing the CPI between any two years however if you do so for equities you have to do so for all other investments.

Earning 2% of a CD when inflation is 3% is actually a 1% loss in "real" (adjusted for inflation) terms.
There is no risk, it simply is a guaranteed loss every single year.

I can't edit the post however that post should say 10 years not 20 years (1999 to 2009).

As of March 19th the DOW total return was +1.3% annualized over last decade.
It was +9.4% annualized over last 2 decades.

[NeedleCast]

14. Investors approaching retirement

Shouldn't have had their money in equities anyway. That's on them, not the market.

[mmonk]

27. While they increase their bond holdings mix,

when you change the rules of the game, AAA rated bonds can be turned into junk in a short amount of time. Most bonds are called when the debtor can get a lower interest rate meaning bond holders have to replace them with lower yields.

[Statistical]

29. You can choose to not buy financial company based bonds. You can choose to buy non-callable bonds.

You can choose to invest only in bonds below par value (so you actually show a nice capital gain profit) if/when bond is called.

I have some really nice Sallie Mae bonds I bought for $0.40 on the dollar. I would love (250% instant profit) is they were called. Likely they won't so I will live with the 10% effective yield on them.

[mmonk]

34. I do when I can buy below par.

I'm a value investor. And when I buy equities, I go by cash on hand, market share, P/E ratios, and lack of debt. My point was when you change the rules (regulations that bring a predictable structure), normal assumptions go out the window and even some long term investments and strategies are adversely affected.

[Statistical]

35. Agreed. Regulation = rules of the game.

Lack of regulation, lack of transparency, lack of credibility in rating agencies over last decade has severely undermined public confidence.

What Moody, S&P, and others did in the ratings game was downright criminal and up there with the worst of the worst of Goldman Sachs and other banks.

The subprime meltdown simply could not have happened without their direct "assistance".

Someone in Senate is proposing a system where creditors are assigned a ratings agency via govt "auction" to remove the conflict of interest where the "rated" is paying the rater directly and make rating agencies directly regulated. Rating agencies that under perform would lose ability to participate (essentially death for agency). Not sure if it has traction but even many brokerages support that change.

[mmonk]

46. At this point, I would tend to support that.

Remove the conflict of interest.

[Statistical]

5. "We are buying the stocks from another gambler that is betting the price will go down."

This would apply to any financial transaction:

If I sell you a collectible or antique you are hoping it will appreciate and I am thinking the price I got was good price.
If I sell you a house at $350,000 I think it is fairly priced as do you.

There is no 20 year period where stocks have lost money or had lower return than any other investment class.

Some people just get caught up in the idea of trading and forget that over short term stocks have tremendous volatility however over long run the returns in a stock reflect the overall value of the company.

If you own shares in for example CAT then you own a (tiny) fraction of that company. The price may have volatility day to day but over say the next decade if CAT does well then your shares will do well and they also will pay you a tidy dividend as a reward for owning a part of the company. If CAT does poorly the shares will reflect that.

People say the market it toally decoupled from the real economy. Ok that should be easy to prove.

Show me a 20 year period where either:
a) underlying company did poorly and stock is higher after 20 years
b) underlying company did well and stock is lower after 20 years

Here is a good graphic that illustrates this. Average total return (capital gain + dividend) of DOW over last 100 years has been 10% however the deviation from that is rather large on short term basis.



Average return is 10%.

However if we look at every 1 year period over last 100 years the return on that 1 year ranged from -45% to +90%.
If we look at every 5 year period (from worst possible timing to best) over last 100 years the total return range improves to -18% to +30%.

Over a decade losses are almost 0. Range is from -1% to 20% depending on which year you started.

Over 20 years there isn't a single 20 year period when stock market had a negative return. Returns range from 2% to 18% depending on where the 20 year period lies.

Another way to look at it. Say you have a chunk of money and decided to invest it 100% in the DOW, never touch it, reinvest all dividends and essentially lock it up for 20 year period. Now I am not saying this is a good idea. Also not investing 100% at day 1 is generally not a good idea because you can't dollar cost average as market declines (buy more when market is lower).



This is how much you would have returned on annualized basis after 20 years.

So there is some "luck" to the market. Someone who put large amount of money by pure good luck in the market in say 1979 returned an average of 15% a year for next 2 decades. On the other hand someone who put entire life savings into market in 1928 only returned 2.8%.

Still there is no 20 year period where market lost money. Stop trading and start investing.

[rhett o rick]

12. Yes that looks great. What I dont see there is the difference between the

average guy earnings and the privilege class earnings. When they are included together you can show that as a whole they did well, but how did the 95% of average guys do against the 5% in the privileged class?

It is touted as "investing", yet most of the money doesnt go to companies but to other "investors" (read speculators).

And owning a small piece of a company is a joke. You have no power to influence what the company does. You used to get a fancy piece of paper, now I dont even think you get that.

Yes the privileged class makes out, but from my experience the average guy doesnt.

[NeedleCast]

17. You can't compare the average guy and the privledge guy

because they are doing different things in the market.

FYI, you still can get your stock certificates from just about every company. Every share holder does have a bit of influence on the company as each share grants one vote for (usually) board members and other elected company officials.

Joe normal has just as much chance of "making out" as a wall street banker does, but the amounts invested are different. The average guy shouldn't be in the equities market for the same reason a wall street type is. If you are using the market to INVEST money you're generally in it long term and not trying to make short term profits. The privileged class often are trying to make short term profits and take subsiquently larger risk (in most cases).

If your question is "Does the little guy stand to make as much as the big guy" the answer is probably not. If the question is "can the market be a valuable investment tool for the little guy" the ansswer is yes.

[Statistical]

18. Your not reading right.

This is not a good return this is actual a very stupid investment system.

put 100% of your money into the DOW and wait 20 years. Nothing complex about it. Nothing that would prevent anyone from doing that.

"but from my experience the average guy doesnt"
antecdotes aside there is no basis for that conclusion.

Often it is a misunderstood relationship between real "losses" and drop from peak.

Here is an example:

Take joe worker. He has no complex investment banker working for him.

His strategy put $5000 into a fund that tracks the DOW every year. He doesn't do anything else. He simply puts $5000 every year into a fund regardless of where the market is. No timing market, no options, no hedges, no "managed investing". Every year $5000 into fund that tracks the Dow.

Say he started in 1988. So $5K in 1988, $5K in 1989..... $5K in 2008. At the peak of the market in 2008 he would have put in $100K (20 years * $5K) right? The value of his portfolio would be $321,014.16. Now the market then tanks over the next 6 months and the value of his account declines to $128K. Now if he sold at the bottom he would get $128,000 cash (he put in $100,000). On the other hand if he rode it out his portfolio today would be worth about $176,000.

If you asked him about investing what do you think he would say? I know.
"The market is crooked. I "LOST" over 200 grand in the market. Of course that isn't the reality.

If he sold at the exact bottom he would have GAINED $28K from this (not very smart) investment strategy. If he held tight (because there is no reason to sell if you don't need the money in next decade) he would be up $78,000.

Perception vs. Reality.

[dmallind]

21. The returns are the same - that's just a DJIA index fund

You can buy it over the counter for peanuts. Anybody can. No need to be rich or privileged or educated or have connections.

[ThomWV]

6. The misunderstanding of the Stock Market and the confusion of it with banking is astounding

I am continuously amazed at how little people know or understand a thing about the stock market and how so very few people can distinguish between the activities of bankers and stock trading.

[NNN0LHI]

8. The Stock Market is NOT the place for amateurs

If you know what you are doing(Read have inside information not known to the general public), you will do alright. Maybe very well?

But if you are just some average person who will tend to invest more with their heart than with their brain it is a losing proposition from the get go.

And the "matching contribution from your employer", is the bait for the scam. People always want something for nothing so they take the bait. The company just loves to match a piece of paper for your hard earned dollars. Doesn't cost them nothing. It is a win, win situation for your employer. ENRON just loved doing that. And the workers just ate it up.

Don

[Statistical]

10. "The company loves to match a piece of paper for your hard earned dollars. Doesn't cost them nothing

Care to explain how company paying 5% of your salary into an account in your name cost them "nothing"?

You are aware that company has to provide cash for matching funds right? That the 401K administrator can never be the employer.

Lastly who says you need to invest in Enron or even your own company. You can put 100% of your 401K in US Treasuries if you want.

[Romulox]

24. Explain this to a neophyte: how do profitable companies get away with not paying dividends?

When a company makes a profit, that money doesn't belong to the B.O.D. or the CFO--it belongs to the shareholders. And yet it seems like a majority of stocks pay no dividend these days (I'm aware that plenty still do.)

Now, platitudes about it all being "built into the price" aside, it would seem to me that without a dividend, buying a stock is much more akin to mere speculation ("gambling") than investment. In such a case you have no direct stake in the company's profitability beyond whether or not you guessed the direction of its stock price correctly.

So why not speculate on whether the 12:05 train will roll into town on time today? Or how many gumballs in a jar? Or better yet, the score of the Tigers-Sox game! Of course, it is arguable that "speculating" on the performance of a stock is a socially beneficial activity, and speculating on the performance of a sports team is not, but this is not at all obvious on its face. It seems like the same category of behavior to me. :shrug:

[Statistical]

26. Very simplified answer but.

When companies are still growing they need lots of cash to expand.

It makes little sense for this GROWTH company to pay a dividend and then turn around and need to borrow money from bank for expansion.
This company could instead not pay a dividend and use the cashflow for expansion. When you buy the stock you are buying it for the FUTURE dividend. The idea that by not paying dividend the company will grow faster and later the dividend will be larger.

Now, platitudes about it all being "built into the price" aside, it would seem to me that without a dividend, buying a stock is much more akin to mere speculation ("gambling") than investment. In such a case you have no direct stake in the company's profitability beyond whether or not you guessed the direction of its stock price correctly.

Not really. Eventually growth companies slow down. As they do they start to accumulate more cash than they can use for expansion and/or acquisistion. They then starting paying out to investors. Even Microsoft (after growing for 20+ years) started paying a dividend.

As long as the company is profitable and growing a lack of dividend is not an issue IF (this is the key point) the company will pay a dividend eventually. For example Apple doesn't pay a dividend however it is still growing rapidly. Eventually that growth will slow and it will start bulging with cash. That cash eventually (IF AND ONLY IF the company continues to be profitable) will be paid to investors.

Buying a share of Apple today is locking in your right to Apples FUTURE dividends. That being said but in volatile markets I tend to prefer companies with solid dividends as a hedge.

Now here is the democratic part:
some companies believe they are more profitable by compounding profits and some believe it is better to return some of profits to shareholders. The market is perfectly Democratic. You can choose (by dollars invested) to validate either or both of those beliefs. Don't like/trust companies that don't pay a dividend? Don't invest in them.

[Romulox]

28. But Apple's board is a fiduciary to EXISTING shareholders, not FUTURE shareholders...

No?

And isn't Apple a bad example? It's been around for decades--it's not some upstart, and it is accumulating gobs of cash (again, this money should rightly belong to shareholders, but Steve Jobs treats it like his play-thing.) My prediction is that we'll see the (third or fourth?) fall of Apple before it gives up any of its horde. :shrug:

http://techcrunch.com/2009/10/20/apples-sauce-34-billion-in-cash-stock-peaks-and-mysterious-shipping-anomalies/

[Statistical]

31. Couple points.

One if you don't sell your shares then you both are both current shareholders AND future shareholders. Apple believes (maybe right, maybe wrong) that they create MORE shareholder value by using cash to expand (and buy potential competitors) than giving it back in cash dividend right now. If you agree with that strategy then you should invest in Apple, if you don't then you shouldn't. If you are uncertain then maybe a mix of both growth stocks and dividend stocks is better play.

Two if you think Apple will fall due to arrogance or poor leadership then likely it isn't a good investment with or or without a dividend.


There are plenty of large, profitable companies paying nice dividends. If you like dividends then stick with them. As far as Apple ultimate cashflow. Eventually if Apple growth rate (and thus cashflow spent on expansion) slows there will be demands from large shareholders to issue a dividend. If Apple doesn't comply many of them will dump Apple and that will hurt stock price. I can't name a single large ($5 bil+) slow growing (<15%) company that is accumulating massive cash (positive cashflow over say last 2 years) that doesn't have a dividend. Nobody would invest in a company like that. As company growth rate slows they need the dividend to support high share price.

[Romulox]

33. Thank you for your responses on this thread. They've been informative.

/no snark

[Statistical]

37. No problem.

The market isn't for everyone. Some people simply don't have the patients or willpower to value stocks properly.
Greed & panic isn't something limited to ultra rich only.

That being said I personally like high dividend stocks (but not too high - which can be a risk).

I remember seeing a report (I will see if I can find it) in January where they compared S&P 500 against high dividend stocks in S&P 500. The S&P 500 over last 10 years (total return including dividends) was essentially flat (I think it was down <1%). The high dividend portion however returned annualized return of 15%. (Don't quote me on that number it has been couple months).

Selling way out of money covered calls against high dividend players is a way to coax another 1% to 2% return out of them.


Dividend + Capital Gain + covered call premium = much easier to hit benchmark 10%-12% annual return. If you can make 9% "real return" (9% > than inflation) the power of compounding gains over something like 30 years is phenomenal. As I have gotten older I start ignoring the home runs and start looking for solid singles and doubles.

[Statistical]

40. One thing about dividends is make sure they are in in tax protected/deferred account.

Roth IRA, traditional IRA, 401K, 403b, etc.

After 2010 dividends will be taxed as regular income. Since unlike capital gains (only happens when you sell) having high dividends in non tax protected account gets expensive quick. Plus paying all those taxes each year reduces the amount you save/invest and that affects lifetime return.

Nothing like a high-dividend stock (or high dividend fund for those who don't want to pick individual stocks) matches with tax deferred account.

[NNN0LHI]

43. Companies like ENRON and others only match with its own company stock

http://articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/7MostCommon401kBlunders.aspx

5. Drinking the company Kool-Aid

In 1999, before Enron flamed out and took many of its workers' retirement dreams along with it, company stock made up 19% of 401(k) assets nationwide. According to EBRI, that percentage has since shrunk to 11%.

http://articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/7MostCommon401kBlunders.aspx?page=2

Continued from page 1

The Enron debacle pounded home the point that you do not want your retirement account riding on the same company that provides your job. Yet many people still falsely believe that their company's shares are somehow less risky than a diversified mutual fund.

Some 33% of workers who were offered company stock as an option put more than 20% of their 401(k) money there. That's a dramatic improvement from 1999, but there are still way too many folks overdosing on the company Kool-Aid.

If you must invest in company stock, try to limit the overall investment to 10% of your balance. If your company matches your contributions with its own stock -- as Enron did and as others still do -- invest all of your own money elsewhere.

[Statistical]

44. No they didn't. (and the articles you provided as proof don't make that claim).

That would be a violation of Internal Revenue Code specifically 26 U.S.C. § 401 section k (hence the name of the plan "401K").

A company CAN offer its stock as an option in 401K however employees can't be forced to take that option. If you put some/all your contributions in employer stock then obviously it will be matched by employer stock.

No the reason why so many employees had lots of Enron stock is much simpler to explain: Greed. The stock went up 60% a year until the collapse. It became a path to riches and wealth. People working for the company would write up spreadsheets showing how many years before they were millionaires. Greed isn't something limited to the ultra rich only.

However the warning of the articles is a good one. It is risky to buy stock from the company where you work. You get a 1-2 punch (employment & assets) if the company hits bad times.

US taxcode clearly requires that 401K plans meet certain criteria. Among them:
* Plan must be available to all full time employees equally
* Employee contributions must be sent to account in employees name
* Any optional employer match must be applied uniformly
* There be no penalties on employees funds at termination (although there can be a vesting schedule for employers match)
* Plan contributions (both employer & employee) are paid in cash to trustee on an accrual basis (as funds are available).

[el_bryanto]

9. Are you a capitalist? And if so how do you propose corporations raise capital?

Bryant

[rhett o rick]

15. I believe that there should be a mix of capitalism and socialism. And I dont have a problem with

investing, actually buying stock directly from a company. I dont know the statistics but IMO 99.9% of money "invested" in stocks is money that is passed back and forth between speculators. How many of the thousands of transactions per day are actually a company selling initial issue stock? Unless you buy the stock directly from the company when they issue the stock, you are not investing in the company.

[Statistical]

23. So a good company issues stock and you buy some.

Now 1 year (or 10 years later) your kid gets sick (or some other financial emergency happens) and you need some money and quick what do you do?

The stock is a good investment but it is only paying out 4% dividend a year. You don't need money over next century you need all the money now. You sell the stock right?


Well who do you sell it to. The company is currently looking to expand. They don't want to buy the share back from you. You could find a third party willing to give you cash for this asset right? Find someone else who believes the long term value of the company. Maybe you take out a newspaper ad showing your interest to sell. Of course what happens if you couldn't come to agreement on price. You think stock is worth $128,000. The buyer thinks it is worth $80,000. You could sell for $80K but maybe you are getting ripped off.

If only you knew what the previous person in this situation sold it for. You know an "estimate" on value of stock. That might give you leverage in selling. So someone invests a service where they will show you the last 100 times that stock sold and what it sold for. Now maybe they even chart it because humans are visual people.

Still making the sale can be challenging. Hopefully the buyer doesn't rob you. Does he have cash? If it is a check will it clear? You likely need a 4th party to arrange the sale to avoid lawsuits later and makes sure both parties are protected.

Now imagine that 4th party starts acting as a middle man everytime someone wants to buy or sell that stock. It also lists current best selling and buying price and provides historical data.

Congratulations you just invented a stock market.

[phleshdef]

20. That depends on you and your reasons for investing.

If you are investing in a company because you believe in its products and want to support it for a return on investment in the long term, then thats investing. If you don't give a shit about what the companies you are investing in do and are just trying to make quick money with a day trading mentality, then thats gambling.

[Romulox]

22. Even before the bailouts, the governments covered your losses.

Ever have a friend who's into stocks? Ask him or her about "taking losses" around tax time.

[rhett o rick]

39. Unfortunately I know too much about taking losses and loss carry over.

The government covers a tiny fraction of your loses. You can deduct up to $3000 from your taxable income. That means the government covers up to about $800 of you losses a year.

[hobbit709]

25. Depends on whether you are small time or one of the big boys.

The big boys always come out ahead. The small time can kiss the money goodbye.

[Warpy]

41. It depends on why you're buying stock

If you're looking for a rise in face value to make a killing, you're gambling.

If you're looking for a long term place to put your money so that it will pay you more money every year with an eye toward getting your money to work for you, it's investing.

[Stevenmarc]

42. If you have to ask, well, enough said.

[WCGreen]

45. One problem I see with the market is that far too many decision makers in listed

companies receive a lot of their compensation in company stock...

This causes them to make decision that tend to look toward increasing the short term gain of the stock in the market so that they make more money when they sell their stock on the market.

This forces far too many firms to depend far too much on the immenser bottom line instead of looking toward the long term horizon.

The stock market has always been a way for traders to make a living on a day to day living. That hasn't changed all that much.

Tax treatment of stocks and stock based benefits also skew how decision makers make their decisions.

[branders seine]

47. it is feeding the beast that is devouring you

with the miniscule chance that the beast will allow to slightly increase the actual value of your investment (or more likely lose all or nearly all)