Investing and Gambling

I was thinking about the problems with the subprime mortgage market. I was also thinking of the buy and hold strategy – like everyone else, I’ve been told that the buy and hold strategy is the way to make money in the market. But not long ago, in one of my “Comparing Presidents” posts, I looked at the S&P500″.

Say you had followed a buy and hold strategy on the S&P 500, re-investing the dividends as they became available. Had you bought in 1966, once you take into account inflation, you wouldn’t have turned a profit until 1992. Now, I’d venture to guess that a) this isn’t something most brokers tell their clients and potential clients, b) most people who bought stock in 1966 were retired by 1992 and living off their shrunken (had they invested in stocks) savings and c) a lot of brokers made money in that period.

Of course, in the 1990s, the stock market exploded, but a lot of companies in which people owned shares turned out to be fraudulent. If you had your money in Enron, or any number of other companies, you’d be screwed. So that raises a question… how different, really, is investing in shares of companies listed on the stock exchange from gambling? At least with gambling – betting on horses or poker or whatever – there’s some degree of transparency.