People are trading stocks like it’s 1999.
Between the quarantine lock-down, free trading commissions, and absence of sports to bet on, this is the perfect storm for brokerage accounts.
At first blush you might think that gambling on sports and gambling on stocks are no different, this was my knee-jerk reaction. And while there certainly are similarities, there are many more differences, and these differences would suggest, generally speaking, that betting on stocks is far more dangerous to your financial well-being for the following 1o reasons:
Stocks are Social, Sports are Isolating
The stock market is made up of companies whose products all of us use on a daily basis.
Not everyone knows who plays for the Lakers, but everyone knows who makes the iPhone.
Online communities are built around stocks for idea generation and camaraderie. Everybody wants to belong somewhere, and these neighborhoods tend to be welcoming, inspiring, and difficult to leave.
Betting on sports an isolating event. You’re typically on your couch, by yourself, glued to the screen. While you might get your ideas online, you’re not in front of the screen during a game the same way that you are for an earnings release.
The Rake
The reason why “the house always wins” in Vegas is because of how wide the spreads are. For example, let’s say the Lakers are playing the Knicks and the Lakers are favored to win by 11.5. Whichever side you take, it’s not even money. You’d have to bet $110 to win $100. If you’re winning at a 50% clip, after 100 games, you’re down 5%. Even if you’re winning at a 52% clip, you’d lose money. Win 58% of the time, which you’re not going to do, and you’re up just 9.7%.
Pay the house long enough and you realize you’re wasting your time.
With online brokerages, commissions are free and spreads are a penny wide. It’s not “rigged” the same way that sports are.
Efficient Markets
You see how efficient the betting market is in sports in a way that you don’t with stocks.
The lines are designed so that it makes it really hard to feel too confident one way or another. Let’s say that you want to pick the Lakers to win the game but not cover the spread, you would have to put up $700 just to win $100.
It doesn’t take long before you figure out that the odd makers are pretty good. You learn very quickly that “Vegas” is an incredibly difficult opponent. When you’re buying and selling stocks, you don’t see the person hedge fund on the other side.
Dollars on the line
You would never in a million years bet $50,000 on a game, but people put $50,000 in their brokerage account like it’s nothing. Granted, you’re not going to lose $50,000 picking stocks in just three hours, but losing a large chunk of it over time is possible, if not likely.
With stocks, the game never ends, which often leads to the six most dangerous words in the investors quote book, “I’ll get out when I’m even.” This mentality hurts investors because as JP Morgan points out, 40% of all stocks have a catastrophic decline from which they never recover.
You might get out when you’re even, but it’s more likely that if you have this mentality you’ll get out at much lower prices.
Trading stocks requires risk management in a way that betting on sports does not.
Overconfidence
Picking stocks doesn’t necessarily feel like gambling. Before pulling the trigger, you probably do some “research” like looking at a couple of numbers, or studying some charts.
You can’t control whether a catch is made or a shot goes in, but you can decide when to buy or sell. The game is played on your terms, which gives traders the illusion of control.
Luck
Everybody knows how much luck is involved with betting on games. Does anybody really think they’re a gifted sports handicapper? Who is the Warren Buffett of sports betting? Exactly.
The stock market on the other hand is full of successful people, and new investors might think mastering the market is just a matter of putting in 10,000 hours. Unfortunately, this rule does not apply here.
Cold Hard Cash
There is a reason why casinos use chips instead of cash. Losing $1,000 in hundreds hurts a lot more than losing $1,000 on a computer screen. (I’m assuming a bookie, or sports book).
Losing physical money is painful, and therefore you’re more likely to govern yourself when betting on a game than betting on a stock.
You know Apple isn’t going to zero, at least not in three hours, which makes you more comfortable using more money. Stating the obvious, losing 25% on $1,000 sets you back more than losing 100% of $100.
Leverage
When you’re betting on sports, most times you don’t have access to leverage. The most you can lose is what you bet. And if your bookie does extend you leverage, you’re going to be careful because you could end up with some broken bones. It’s a lot easier to use margin from a faceless computer screen than it is from somebody who shows up at your door to collect.
I’m Gonna be Rich!
There are thousands of shady newsletters and scam artists preying an endless supply of noobwhales.
Granted, there are plenty of predators in sports betting, but the average person probably knows picking sports is a matter of luck while believing picking stocks is a matter of skill.
Your financial future
Trading stocks is not likely to be a profitable endeavor, and this is why betting on them can be so much more dangerous than betting on sports. Once new traders experience an ample amount of failure, they can go down two potential paths:
The first person sees the light. They realize that they’re betting against professionals who have more resources than they’ll ever have. They learn it’s a game not worth playing at all, and discover some sort of approach that doesn’t attempt to beat the market.
The second person never learns. They spend their entire life searching for an answer that doesn’t exist. They waste their retirement account contributions by trying to be the next Paul Tudor Jones. Learning a little bit about the stock market can be the most expensive decision they ever make.
***
When Josh asked me “What’s the difference between gambling on a game and gambling on a stock?”, my knee-jerk reaction to this question was “nothing. Gambling is gambling.” But that’s really not true. Gambling on stocks is way more dangerous for all the reasons I just mentioned.
Check out A Degenerate Gambler Walks into a Stock Exchange
