Investing in the stock market vs. casino: deciphering strategies, risks and gains to maximize your profits!

DIn everyday language, we often use the expression "Playing the stock market", a bit like indulging in a game of chance. Moreover, for many people, investing in stocks is like playing in a casino. While it is true that in the short term, the markets are similar to a random walk, it has been proven thatinvest in stocks for the long term is the best way to make a fortune. 

But then, why does the casino attract some of us so much and why does the stock market, on the contrary, scare most people so much?

Gambling managers are very good at exploiting two of our weaknesses:lure of gain, especially very large sums, and theaddiction generated by winning smaller amounts more regularly. Most of the entertainment offered plays on these two tables: potential for very large gains on one side and small regular rewards on the other. These two phenomena allow us to easily forget all the losses incurred to access these winnings.

On the contrary, the stock market does not allow you to make very big gains in the short term. It also often gives us the impression of losing money, which is partly true as we will see later.

The problem is that the brain cannot correctly interpret short-term gains and losses. This is especially true if the level gains/losses and their frequency are important.

A big win can make you forget a lot of small losses.. Conversely, small regular gains can make us forget a bigger loss. In the longer term, strategies that seem to us to be winning can turn out to be catastrophic. This is the case with games of chance. Conversely, an approach like the stock market that seems to lose quite frequently in the short term, actually turns out to be profitable in the longer term.

To illustrate this phenomenon, here is a comparison of the statistics of daily profits made over the last 30 years on the American market (S&P 500) and winnings achievable with the most famous casino game: the roulette. For the latter, I considered a mixed strategy, consisting of betting in different ways (straight, split, crosswise, square, sixain, red, black, even, odd, lack, passes, dozens and their intersections, columns and their intersections).

The distribution of winnings differs significantly between games of chance and the stock market.

First difference, the worst loss is "only" -11% daily on the S&P. This may seem like a lot, and it undeniably hurts on the day in question. But fortunately this happens very rarely. Conversely, losing your stake completely with roulette is unfortunately very common. Once you lose, you lose everything.. There is no half measure.

Roulette obviously does much better from the point of view of the best possible gain, with 3500%. To do this, you will have to find the right number ("right"). It's the jackpot. It makes you forget past disappointments and tickles our lure of future gains. But there is only 2.7% chance of landing on it... The best daily gain on the S&P seems quite paltry in comparison, with 15%. Here too it is very rare for the market to rise so much in one day and it is not with this that the stock market distinguishes itself in a good way from roulette.

It's more interesting if we focus on the average daily gain made with the American market. With 0.04% there's nothing to sing the serenade about, you might say. However, it assures us in the long term of an average annual gain ofaround ten percent per year, which corresponds to the nominal historical performance of the stock markets.

At roulette, on the other hand, it is already less funny. Despite the potentially significant gains, the repetition of the total losses mentioned above, generates an average loss of -2%. In other words, in the long term, with the repetition of bets, you are sure to lose money with roulette.

Separating gains from losses allows us to understand what makes all the difference between the stock market and gambling. We note in fact that on the American market, the average gains of days ending in the green amount to 0.78%, while those of days ending in the red amount to -0.82%. This explains why we often have the impression, in the short term, of losing money with the stock markets.. This is the complete opposite of roulette, which offers, when the bet is won, an average gain of 800% (average of strategies), which is much more than the 100% lost when the bet is not won.

The stock market, however, ended up winning the match, thanks to the number of positive days. With 54%, or just over half, it is certainly not great. It can even add a little confusion in the short term, reinforcing the feeling of failure already mentioned above. But these small percentage points higher in winning positions allow the stock markets not only to erase previous losses, but also, in the long term, to make nice gains.

It's the complete opposite of the roulette that only offers 11% winning bets (average of strategies). Of course, by betting on "safer" approaches, it is possible to increase this rate to 48.6%, but this at the cost of lower gains. It is also never possible to obtain 50% of winning bets, because of the ZERO, which is neither considered even, nor odd, nor red, nor black, nor lack, nor pass. Did you say ZERO?

From then on, Let us be wary of the lure of big winnings achievable at the casino and/or the addiction created by the frequency of smaller winnings. Let's not forget to take into account the total losses of bets that follow one another at a frantic pace. Let's not be picky either, in the face of the modest but fairly regular gains offered on the stock markets. These create a real snowball effect, which allows you to get rich in a safe way over time.