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The Stock Market is NOT a Casino, it’s a Racetrack

Posted on 

May 13, 2024


By Dennis McNamara:

The stock market is not the casino, it’s the horses on the racetrack.

I’ve always balked at the analogy of comparing the stock market to the casino but it wasn’t until picking up Poor Charlie’s Almanac: The Essential Wit and Wisdom of Charlie Munger (RIP Charlie) that I heard about this more appropriate comparison.

The stock market is not a casino with randomly assigned odds.

Rather, it’s a pari-mutuel system.

A pari-what???

Pari-mutuel betting systems are used at racetracks.

They are a type of betting where everyone’s bets go into a big pool.

Instead of betting against the house (like in a casino), you’re betting against everyone else who’s placing a bet. The house takes their cut off the top.

Charlie explains that “any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position is way more likely to win”… but…”if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2.”

However, unlike a pari-mutuel system, the stock market isn’t zero-sum – as the overall market continually grows, one person’s gain isn’t necessarily another’s loss.

Similarly, the stock market can resemble the casino if you are a short-term, speculative trader.

As such, the stock market is either

  1. A gambling machine
  2. A reliable wealth-creation machine

The only difference between 1 & 2 is your holding period.