An S&P 500 index fund or GameStop? Since 2021, one has significantly increased your income.
Do you gamble? or a financier? Given that stock market investors typically outperform gamblers in the long run, this is a crucial question.
The long-term prospects of a stock will be the main focus of investors. The converse is true for stock market gamblers, who focus on the possibility of a spectacular short-term gain in a stock.
Asking yourself which of the following stocks you are most inclined to is an excellent way to start figuring out whether you are more of a gambler than an investor:
Palantir Technologies Inc. (PLTR) has a highly positively skewed distribution of daily returns and a stock that is significantly more volatile than the great majority of other equities. These two traits suggest that the stock has a significant downside risk in addition to a slim potential of generating a sizable daily gain. The company’s stock has increased 82.7% so far this year, compared to 2.4% for the S&P 500’s SPX total return as of June 17.
One of the least volatile companies on Wall Street is Caterpillar CAT, whose daily return distribution is much more like to a typical bell curve. So far this year, the stock price has remained unchanged.
As per the findings of a 2021 study titled “Only Gamble in Town,” Palantir’s stock is regarded as a “lottery stock,” but Caterpillar’s is more appealing to long-term investors. You’re probably more of a gambler than an investor if you’re lured by equities like Palantir’s.
Huong Nguyen of the University of Da Nang in Vietnam, Talis Putnins of the University of Technology in Sydney, Australia, and Alok Kumar of the University of Miami carried out the study.
In their letters, Kumar and Melissa Vosse also mentioned Trump Media & Technology Group Corp. (DJT), Dutch Bros. Inc. (BROS), and Constellation Energy Corp. (CEG) as examples of contemporary lottery stocks. Vosse is a University of San Diego assistant professor of finance who has also studied stock market gambling behavior. The lecturers also mentioned GE Aerospace (GE), Cisco Systems Inc. (CSCO), AT&T Inc. (T), and Costco Wholesale Corp. (COST) as instances of non-lottery-type stocks.
If you’re a stock market gambler, you’re in good company. Surprisingly, a significant portion of market players are. By comparing trading activity in both types of stocks whenever a particular nation put limitations on more conventional gambling activities, the study’s authors calculated the monetary value of stock-market gambling. Lottery stock volume increased on average, but non-lottery stock volume did not.
With meme stocks, far more money is lost than made.
The short-term potential of a lottery stock often stems back to social media interest in the stock going viral, or, to put it another way, turning into a meme stock. If you’re early to the party before a stock gets viral, you can make a lot of money, but meme stocks lose far more money than they make.
A research of Robinhood Markets Inc. (HOOD) clients, a subset of investors who are disproportionately interested in meme stocks, supported this. The study, titled “Attention Induced Trading and Returns: Evidence from Robinhood Users,” was carried out by Chris Schwarz of the University of California at Irvine, Terrance Odean of the University of California at Berkeley, Xing Huang of Washington University, and Brad Barber of the University of California at Davis.
They discovered that “betting against Robinhood users is a profitable business; the top stocks bought by Robinhood users fall by 5% over the next month.”
GameStop Corp. (GME), the original meme stock from January 2021, is an ideal example. The stock was up over 2,400% from the end of the previous month at one point during that month. Nevertheless, GameStop’s long-term performance has been abysmal, as the accompanying chart illustrates. You would have significantly less money today than you would have if you had invested in an S&P 500 index fund, even if you were fortunate enough to buy the stock before its meteoric rise in January 2021.
Therefore, even while stock gambling isn’t inherently bad, you should be aware that you will probably pay a premium for it.
MarketWatch regularly receives contributions from Mark Hulbert. Investment newsletters that pay a fixed fee to be audited are monitored by his Hulbert Ratings. His email address is mark@hulbertratings.com.
