Warren Buffett says the stock market is becoming increasingly ‘casino-like’ – and young investors should remember this ‘one fact of financial life’ to avoid the mess

By | February 27, 2024

Warren Buffett, CEO of Berkshire Hathaway, shared a moving tribute to his fallen friend and right-hand man Charlie Munger in his annual shareholder letter over the weekend. Hailing Munger as the “architect” of Berkshire’s success, the Oracle of Omaha praised the “hideous nobody” by discussing some of his favorite whiplashes – including his comparison of the modern stock market to a casino.

“For whatever reason, the markets are exhibiting much more casino-like behavior now than they were when I was young,” Buffett wrote, adding that “although the stock market is vastly larger than in our early years, today’s active participants are no longer emotionally stable nor better taught than when I was at school.”

Buffett’s words of caution were certainly a throwback to some of Munger’s favorite lines. Throughout his more than 75-year career, Munger argued that there were two types of people who bought shares in the stock market: investors and speculators. The investors – who are, above all, disciplined, hardworking and thoughtful when purchasing assets – have always been Munger’s people. But the speculators – the ones looking for nothing more than a quick buck, without worrying about the intrinsic value of what they’re buying – well, Munger didn’t really like them.

“They love to gamble, and the problem is it’s like taking heroin,” he said in an April 2022 interview with Berkshire Hathaway investment officer Todd Combs. “A certain percentage of people just overdo it when they start out. It’s that addictive. Crazy, it’s gotten crazy. Without it, civilization would have been a lot better.”

Like Munger, Buffett fears that too many modern investors have become entranced by speculative investing. Instead of delving into Securities and Exchange Commission (SEC) filings to find the best possible company to invest in, too many investors, especially young investors, simply buy trendy stocks, hoping someone else will buy them. will pay more for it in a few months. days or even hours later. What or who does Buffett blame for this increase in “casino-like” behavior in the markets? Well, the democratization and gamification of commerce certainly isn’t helping. As the billionaire put it: “The casino is now in many homes and seduces residents every day.”

Becoming a ‘casino’ in the stock market

Part of the reason the stock market is becoming increasingly “casino-like,” according to Buffett, is simply that buying and selling stocks has never been easier (or more fun) due to the rise of online trading applications. The SEC likes the first part of that sentence, but not so much the second. Here’s how SEC Chairman Gary Gensler put it in a statement in 2021 after launching an investigation into the gamification of trading applications:

“While these new technologies can provide us with greater access and product choice, they also raise questions about whether we as investors are appropriately protected when trading and receiving financial advice… In many cases, these features can encourage investors to trade more often, invest in different products, or change their investment strategy.”

Like Gensler, Buffett worries that the gamification of trading is leading to an increase in the number of speculators in the market, and in this modern age of connectivity, Berkshire’s CEO worries that the market could more quickly “panic” to arise.

“The speed of communications and the wonders of technology are causing instant global paralysis, and we have come a long way since the smoke signals,” he warned. “Such immediate panic won’t happen often, but it will happen.”

Remember this important ‘fact of financial life’ – and you will avoid gambling in the market

For the speculators who use the stock market as a casino, Buffett had one important tip: remember who really makes money from your gambling: the House of Representatives.

“One fact of financial life should never be forgotten,” he wrote. “Wall Street – to use the term figuratively – would like its clients to make money, but what really gets its residents’ juices flowing is feverish activity.”

Modern brokerage firms sometimes tempt investors into stocks or complicated derivatives with new and fancy features in their trading apps. But they don’t do it to help the average retail investor, they do it because they make money from the fees on every transaction. That means the more transactions, the better it is for the House, even if that doesn’t apply to investors.

During periods when larger audiences become interested in stocks, Buffett explained, “any foolishness that can be marketed will be vigorously marketed – not by everyone, but always by someone.”

Berkshire’s CEO noted that when the situation then “gets ugly” and speculators lose money during a market crisis, they shouldn’t expect a helping hand (or justice) either.

“The politicians then become furious; the most egregious perpetrators of misdeeds slip away, rich and unpunished; and your neighbor friend becomes bewildered, poorer, and sometimes vengeful,” he wrote. “Money, he learns, has trumped morality.”

This story originally appeared on Fortune.com

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