Casinos have long-term odds in their favour, so why do gamblers effectively bet against the house? For enjoyment of course! And perhaps the chance to win big, as the house has the advantage over the long-term, not so much the short-term. You might just get lucky.
If you are going to bet on roulette go to a European casino. They only have one "0" on the wheel (where only the house wins), giving the casino a 2.7% advantage over the bettors.
You could decrease your winning odds by betting on the spinning wheel in Las Vegas, where both a "0" and a "00" reside on the roulette wheel (the house wins) allowing the casino a 5.25% advantage.
With the stock market calculating the odds is much more difficult. Nothing is cast in stone. High-speed traders have an informational advantage, but only for short-term trading.
Where private investors have an advantage is that we can invest with the "wind at our back". Corporate earnings have historically risen over time with a corresponding rise in stock valuations. If we stay "long" equities, over time the earnings tailwind increases our portfolio value. It is an uncomfortable ride, but time is on our side.
There is a meaningful historical bias to rising markets
I looked back at the S&P 500 since its inception in 1957. On a monthly basis, this index has produced a positive return 60% to 70% of the time. Not far off from the 70% annual experience of returns greater than zero. No special insight is required, only patience.
You could try and bolster the return by timing your entry and exits. This bet against the house is in full swing as reported in the National Post (June 8/23). "A recent Bank of America survey indicated that exposure to U.S. equities was at a 17-year low at the outset of 2023". The survey also noted that large investment managers are holding 6% in cash (typically cash reserves are closer to 4%......6% cash is near the average peak). So lots of cash on the sidelines could be invested to further bolster the markets.
Let's take Morgan Stanley as an example of a large money manager. With the S&P 500 currently valued at 4,283, Michael Wilson of Morgan Stanley forecasts a correction at some point to 3,200.
Bloomberg goes on to quote, " Morgan Stanley team led by Michael Wilson said there's a low likelihood of the Fed cutting rates in 2023 and sustained growth playing out simultaneously, leaving them to expect a tactical correction in equities before a durable recovery and a real bull market."(June 5, 2023)
I wish I or anyone had the insight to call for a 25% correction, followed by a bull market. To be fair, Michael Wilson went on to remark that it is hard to get both the timing and the price right (we are in agreement on this point, as economists generally advise on price or time but certainly not both). Cathie Wood of Ark Innovation would seem to partially understand this principle with her prediction that Bitcoin will trade at $1 million in the next decade. If you are going to predict a price, at least provide a very long time frame to allow for substantial wiggle room.
regards, Tim
Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.
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