Warren Buffett: “The Stock Market is Like a Casino”

For decades, the stock market has offered everyday Americans an avenue to grow and preserve their wealth, which is why the current market is confusing for investors. Today’s financial markets are radically different from the markets of yesteryear. Warren Buffett even described the market as “casino-like” in his 2024 annual letter to Berkshire Hathaway investors—a clear indictment of the current system. 

In fact, Buffet’s market indicator measures the size of the US stock market and suggests in early 2024 that a potential downturn might be on the horizon. This indicator uses a simple ratio to get a pulse on the market — a 100% reading if fair. Lower readings say 70% or 80%, suggest stock prices are at a bargain price, while higher readings warn investors against emotional purchases. In late March, the rate was at 190%. 

But what makes the stock market so unpredictable today? Let’s take a look.

The Evolution of the Stock Market

Buffet started his career as an investment salesman in 1951, in an era without cell phones or the internet. It was a time of manual trades and physical certificates. It was a time when the investor could “turn off” their portfolio-related worries after the markets closed. 

The 1950s and 1960s also benefited from decades of regulation following the Great Depression. Laws like the Securities Act of 1933 and the Investment Advisers Act of 1940 offered greater protections for investors.  

Furthermore, Benjamin Graham, Buffet’s mentor, had advocated for the value approach to investing. Buffet, like Graham, focused on the quality of the companies they invested in, evaluating their long-term value rather than short-term gains. 

The rising investor interest in the stock market, combined with greater protections and market limitations, set strong foundations for wealth preservation and growth. 

Today’s market is a little different. 

Algorithms and 24/7 trading options—even if you have to wait until market hours for trades to be executed, cause investors to be on all the time. Constant news streams and pundit commentary can easily foster market anxiety and promote emotional trades.

SEC regulations are still catching up to rapid technological advances in investment and general financial software. This can include brokerage platforms but also robo-advisors and trading algorithms. 

We’ve also seen a distinct difference between the stock market and the business economy. The stock price, more often than not, represents what investors believe the value is. This can be pumped up artificially, through illegal market practices, or more commonly, hype or anxieties. 

The GameStop event of 2021, in which a declining video game store regained a financial foothold through collective stock purchasing, is one example. A group of amateur investors and Reddit users rapidly pumped up the value of GameStop stock, showcasing potential loopholes in the market system regarding market efficiency and manipulation—not just from the participating investors but also from trading platforms and regulations. 

Unlike bonds and other fixed-income assets that rely on strict mathematical principles, the emotional nature of the stock market lends itself to gambling-esque behaviors. 

On top of this, the stock market itself may be shrinking—offering less diversity to investors. JPMorgan Chase has reported that there are 40% fewer public companies today than 30 years ago, limiting investment opportunities to private equity. 

What Does the Investor Need to Consider Today?

Given the volatile nature of today’s market, the modern investor needs a financial plan more than ever. Staying focused on pre-defined objectives and learning to “turn off” market talk are great ways to limit the emotional liabilities that come along with stock trading. 

Investors promoting value-based approaches, like Buffet, have long advocated for diversification, buying low, and logical, not emotional, investment decisions. These are still practical techniques for the modern investor.

It can help, however, to consider the casino analogy when selecting investments. 

Casinos earn more when players continue to gamble, and several strategies exist to achieve this. For example, a casino may remove clocks from the premises, use chips instead of cash, and offer upfront incentives to keep players at their tables. Colors, game placement, and additional entertainment all provoke emotional responses in the player. 

Financial platforms can be similar.

To combat these challenges, you can:

• Set specific times to evaluate your portfolio
• “Turn off” financial news during your off-hours
• Prioritize trusted advice from family, friends, and advisors over pundits
• Draft a financial plan that budgets investment spending 
• Identify investment options for bull and bearish markets
• Work with a fiduciary advisor to tap into high-quality institutional investments
• Select brokerages or trading apps carefully, focusing on transparency over initial incentives and convenience 
• When you see absurdly high returns—take a breather and do some additional research

It’s possible to maintain control of your investment portfolio. With a bit of preparation, you can more easily focus on your specific portfolio’s growth and wealth preservation—without sacrificing peace of mind.