Stock trading has often been compared to gambling. Investors put their money at risk, looking for the value of portfolios to rise with gains in share value while avoiding losers, much like blackjack players will seek to increase the size of their bankrolls with winning wagers and by limiting losses. But if it came down to a choice between investing a certain amount of money in financial instruments or betting it at the blackjack tables, which activity would really involve more risk?
Identifying Apples and Oranges
A financial portfolio, of course, is nothing like a bankroll. An investor will typically have all of his/her funds in play at one time, balancing potentially high-risk/high-reward investments (like buying and selling commodities on margin) with slow-growth, virtually risk-free holdings such as treasury bills or bonds that yield a fixed rate of interest. In contrast, blackjack players put only a small portion of their bankroll at risk on each hand. In this sense, blackjack is inherently less risky in the short term. No matter how badly things go, a devastating loss cannot occur on a single hand, unlike stocks and mutual funds that can be rendered all but worthless by a disaster, natural or manmade.
In the long term, however, the situations are reversed. Historically, financial markets always trend upward. Even in the worst days of the Great Depression in 1932, the Dow Jones Industrial Average was still higher ($40.22) than it was at rock bottom in 1904 ($40.18), and every downturn since then has been met with an upturn of considerably greater proportion. The game of blackjack, on the other hand, typically has a built-in House edge of 0.28% to 1.5% or even higher, which all but guarantees that the average player will lose slowly over the long term. A long losing steak can greatly deplete a bankroll, whereas an economic recession can hurt but not destroy a well-balanced portfolio anchored by secure investments, and a rebound is all but assured over time.
Of course, skill plays a role, too. A better-than-average blackjack player can use “advantage” techniques such as card-counting and hole-carding to turn the House edge on its head and create a positive expected value for every session of play. Investors are more limited in this respect. Even with a crystal ball to guide how they invest their funds, they can’t escape trading commissions and fees.
No matter how perfectly blackjack is played, there is always is always a “risk of ruin.” It might be on the order of 0.01%, but it can never be eliminated completely. Some investments, however, are intrinsically impossible to ruin, such as precious metals. The phrase “as good as gold” refers to how an ounce of the mineral may fluctuate in price, but it never completely loses its value. An investor with no liabilities and all of his/her assets in gold has zero risk of ruin.
Stocks, of course, are a different story altogether. Companies can go bankrupt, often without any warning. Stock values are subject to an almost infinite variety of influences, from the activities of competitors and changes in management to weather conditions and currency fluctuations. By and large, the events that impact prices are out of the investor’s control. Quite the opposite, blackjack is a game with a fixed number of outcomes and a finite number of influencing factors, including the House rules and table limits. A player makes decisions that directly affect results and can therefore increase or decrease the amount of risk involved.
Given a certain amount of money, say $100,000, it is extremely difficult to know whether playing optimal perfect blackjack would be less risky or more risky than financial investing for a day, a month or a year. Clearly, it would be possible wager the $100,000 double or nothing at a single hand of blackjack played optimally, but perhaps with no more risk or likelihood of success than investing the entire amount in crude oil futures on margin without a stop loss. Like apples and oranges, the two modes of earning profits and taking risks are hard to compare. In large part, which one to choose ends up being a matter of taste.