Are You an Investor or a Gambler? Yes

In periods of trouble or uncertainty, a familiar and trusted face can serve to calm the masses and bring reason to a fractious debate.

So mutual fund kingpin Fidelity Investments’ timing appears fortuitous in bringing Peter Lynch back into our homes via a new TV and print ad campaign.

Lynch, the white-haired investment legend who guided Fidelity’s Magellan stock fund to spectacular returns in the 1980s--making the fund a household name, and making stock-fund investing in general respectable again--now stars in a TV ad in which he chastises investors who don’t do their homework.

“Buying what’s hot without doing your research isn’t investing. It’s gambling,” Lynch scolds a character played by actress Lily Tomlin, after she asks for some hot tips.

That’s a very traditional notion, of course--that investing and gambling are two different things. The implication is that if you religiously follow basic investing rules (doing your homework, as Lynch instructs), you will inevitably succeed. The inverse implication is that the gambler cannot succeed in the long run.

But are gambling and investing really two separate disciplines?

I would make a case that in some very important ways they are one and the same--and that to think otherwise can be dangerous, especially at a time when the stock market is on the rocks after a nearly eight-year bull run.

Let’s start with the dictionary definition of gambling (courtesy of Webster’s): “to take a risk in order to gain some advantage; an act or undertaking involving risk of loss.”

Hmmmm. Does that describe stock investing? Certainly you’re buying stocks in order to gain an advantage--a higher long-term return than you can get from other investments.

And certainly you’re taking a risk in buying stocks, as the market’s dive of the last few months has demonstrated in spades.

Many investors in individual stocks have seen their shares’ value plunge by 40%, 50% or more since spring. If you were unfortunate enough to be a big buyer in the market just as it peaked, your losses so far--even if still just on paper--may exceed what someone drops in a typical excursion to Las Vegas.

Of course, investors who’ve suffered paper losses can argue that they’re in it for the long haul, and that history shows the stock market does pay off if you can hang in for an extended period.

That is likely to be true in the future as well, because the stock market ultimately reflects the economy’s growth. But there is no certainty there--not like the relative certainty of putting your money in a federally insured bank account that pays a specific rate of interest.

There have been long periods in which stocks, or at least certain groups of stocks, did not provide much of a payback at all. From 1965 through 1974, for example, the return on blue-chip stocks was negligible. The market bounced around, but it ended that 10-year period barely higher than it began.

Imagine how that felt to investors who in 1965 were planning for retirement 10 years away. Imagine that those investors did their research and concluded that the stock market was the only logical investment bet to make to ensure a decent nest egg 10 years later.

Were they investing? Yes. But they also were gambling--because the stock market isn’t a sure thing. It’s risky, and it may not pay off as you expect it to.

In the 1990s, at least until this summer, the stock market had begun to look as if it might have become a sure thing. Blue-chip stocks in recent years rose at a 30% annualized rate. Historically, they averaged an 11% annualized gain. Something was out of whack, but who asks questions when gold rains from the sky?

Now, amid the worst market decline since 1990--and for many individual stocks, the worst since 1987--many investors have been forced to consider the historical realities of the market: that you can lose a lot of money in a hurry, and that, once lost, it may never be recouped, depending on the individual security.

Does this sound too bearish? It’s not meant to. There will always be money to be made in equities, unless the world as we know it is coming to an end. And the longer the time horizon you have, the greater the probability that you will profit from a diversified stock portfolio. That is indisputable.

But if you start by recognizing that stocks are ultimately gambles, you will be more likely to protect yourself by hedging that bet--via diversification into other assets besides stocks (bonds, money market accounts, real estate) and by understanding that money you absolutely cannot afford to lose doesn’t belong in the stock market, period.

So is Lynch, who retired in 1990 from fund management at the young age of 46, wrong to make a distinction between stock investing and gambling?

I wouldn’t argue with his principal point: that people need to spend much more time educating themselves about their investments and about markets in general. That should improve your odds of success, just as education and practice improve your odds of succeeding at almost anything else.

But in the end, stocks still are a gamble. The best research and strategizing can give you an edge, but ultimately blind luck may play a bigger role in the outcome than we’d all like to admit.

Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.