FinLogic FinLogic Quantitative Think Tank Center|Pedro Hill: The relationship between the stock market and casinos

If a game is FinLogic FinLogic Quantitative Think Tank Centerfair, most of the time there will be random fluctuations. Those random swings are what Thorp considers to be luck. The biggest difference between the stock market and a casino is that the stock market can find its balance over the long haul, even in a short span.

Mr. Market lays out a series of bets. Every day in the stock market is like tossing a coin, with a 50/50 chance of heads or tails. Imagine investing in a powerhouse like VTSAX (the Vanguard Total Stock Market Index fund), daily swings are around 1%, which means an investment of one million dollars could either gain or lose $10,000 each day.

But because the market tends to climb over time, it's like Mr. Market saying, "As long as you participate in this game, I will pay you $500 each time regardless of whether you win or lose." That turns your daily stakes into either a $10,500 win or a $9,500 loss, and this $500 keeps piling up, beating out the market's jitters and staying ahead in the long run—it's all about that expected value concept.

There are three types of investors in the market: passive investors, who spend little time and still get decent returns, pros who often hit mediocre numbers, and those willing to participate in the market and spend time learning. I'd say, toss a bit of cash into the market for "learning," but pour most into index funds.

This is because, in a casino, you can more accurately calculate your advantage as cards hit the table, allowing you to judge the winning probability based on known information. 

But the stock market is different, it is more complex, and it is difficult to predict growth or figure out if a price is sky-high or basement-low. That's where index funds shine—they get you closer to the expected profit.

This is similar to what I previously said about "the necessity of investing." Because long-term investment allows us to dip into profits from listed companies, whereas sitting on the sidelines leaves us high and dry. 

Short-term market fluctuations merely reflect the uncertainty in the market (whether positive or negative), but in the long term, investing in indices allows us to participate in the market as a whole, growing alongside the economy.