Andrew Hallam

Should You Play In The Stock Market’s Casino?

A burley man in front of a slot machine orders a drink from a passing server. Several stoic players sit around a poker table. Dazzling lights and electronic pinging draw attention to every corner. Nearby, a woman jumps from her game in delight as a red light spins above. A pasty old guy and three middle-aged women rush over to see how much money she has won.

Tempted by her luck, you step in front of a nearby slot machine before someone taps your shoulder. “Your Uncle Lenny wants to see you,” says the attractive young casino employee.

Sitting in a comfortable green chair, book in hand, is your mother’s brother, Lenny. As you approach, he looks up from his oddly titled book, Extraordinary Popular Delusions and The Madness of Crowds.

“A little bird tells me you were about to play,” he says.

“I watched a woman make a fortune on a slot machine,” you reply, “So I wanted to try my luck.”

Uncle Lenny leans back with a glint in his eye and a mischievous smile. “Over time, he says, “I’ll make more money than any of these players.”

“What do you mean?” you ask.

“Well,” he says, putting his book on a small table, “Every game is rigged to favor me, the casino owner. Of course, some people will win money, maybe even a lot of money, but after they win, they’ll keep coming back. And when they do, I’ll eventually make more money from them than they’ll ever make from me.”

“Uncle Lenny, do you make money every year?”

“I make money roughly seven out of every ten years,” he says. “Sometimes the economy isn’t great or we have to update our facility. But there’s one mathematical certainty: even during years when the casino doesn’t earn a profit, we ensure that the players make less.”

“That sounds totally rigged,” you whisper.

“There’s no need to whisper,” he says. Every player knows it. At least, they should.”

“But if the game is rigged,” you ask, “Why do they keep coming back?”

Lenny smiles again and says, “Hope springs eternal. Sometimes people win big for a while. Those are my favorite players because they think they’ve found a secret sauce. That makes them keep coming back. And the longer they play, the higher the odds that I’ll eventually make more from them than they ever made from me. That’s why, to keep them happy, I also give them free drinks, food vouchers, even complimentary hotel rooms.”

Shaking your head in disbelief you ask, “So…it’s better to own the entire casino than it is to play the games?”

“That’s right,” says Uncle Lenny.

“But what if I set aside a tiny amount of ‘play money,’ to gamble in your casino?”

At that point, Lenny turns serious. “Studies show that people dislike losses twice as much as they like gains, so if you want ‘fun money’ spend it on sky diving or on a camping trip with your friends. Buy an experience or give the money to charity. That’s how to boost your life satisfaction. Remember, the house will beat you in the end. And when the pain of the loss exceeds the joy of the win, there’s no fun in that.”

In many ways, the stock market is much like a casino. You could buy a hot stock or fund. But hot hands turn cold because the game is rigged in favor of a low-cost global stock market ETF. Much like the casino, a global stock market ETF doesn’t earn money every year. But it always earns more than the collective returns of its players.

There are two reasons for that.

First of all, professional traders manage most of the money in the stock market. As a result, before investment fees, the aggregate return of all professional traders in the stock market will equal the return of a broad stock market index. But after investment fees, a low-cost global stock market index or ETF will beat the aggregate returns of the world’s professional traders. This is an academically irrefutable premise, much like gravity here on Earth or a casino’s house advantage.

The second reason is a result of something called, “Reversion to the mean.” Much like the casino, hot hands turn cold. They then get slapped by the house, which plays a rigged game.

Consider the world’s most famous hedge fund manager, Ray Dalio. He was like a Blackjack master who said, “Put your money on me. I have a winning record.” But that made people like Uncle Lenny smile. Most of Ray Dalio’s investors piled into his fund when this rocket ride was almost out of fuel. That’s common. Investors don’t pile money into players who haven’t yet won. Instead, they bet money on players who have won in the recent past.

At the height of his popularity, when Dalio was “The Man,” a global stock market ETF began to thump his hedge fund. As always, it’s best to own the casino, instead of placing bets on any player.

That doesn’t, however, stop people from trying. In 2008 the firm Protégé Partners told Warren Buffett that past winners could keep winning. Protégé Partners picked the best-performing investment poker players: a series of hedge funds that had beaten the stock market index. Buffett said, “I’ll wager that the house (a U.S. stock market index) will beat these U.S. based hedge fund professionals. And ten years later, Buffett collected on that bet. The house won, which Buffett figured it would.

Buffett, history’s greatest investor, has instructed that his estate be invested in a portfolio of index funds when he dies. Buffett knows that, in recent years, “the house” has even beaten him, as measured by his holding company’s performance, Berkshire Hathaway. Most of Berkshire’s money is invested in U.S. companies. He averaged 11.19 percent annually in the ten years ending December 31, 2020. In contrast, a broad U.S. stock market ETF averaged 13.66 percent.

Buffett knows the game is rigged to favor the house. And in case you are wondering, the answer is, “Yes, with a global stock market ETF, you would own casinos too.” I’ve described how investors can build diversified, global portfolios of ETFs in my book, Millionaire Expat.


Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

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