Dorato News - October 2025

Portfolio Issues - Gambling vs Investing

A number of long-time investors have noted that the stock market feels a bit more like a casino these days. That got us to thinking: what’s the difference between gambling and investing?

On one level, gamblers bet on a specific outcome, whether at the casino, the racetrack, or in the stock market. They might think they have some specific insight, or they feel particularly lucky that day. And we see some of that sort of activity going on (think Bitcoin, or brokerage firms such as Robinhood).

But we think a more fundamental difference between gambling and investing lies in the time horizon. The shorter your time horizon, the more an investment in the stock market looks like a gamble. If you look at returns for the S&P 500 year to year, there will be variations. Sometimes those variations are significant, especially looking at the past 5 years. But if you take the average return over a longer period, the annual returns are generally positive.

People with a short time horizon are more likely to make decisions based on short-term factors, such as momentum (if a stock is rising, it will continue to rise). They are not likely to consider cash flow and earnings, which are important to long-term investors. We care about what type of business a company is in, and who’s running it. Those aren’t important considerations for short-term investors.

So the long-term is not a bunch of short-terms linked together. The criteria for decisions are entirely different and will lead an investor in different directions. If you know you will need money in the next several years, that money should be in cash, not stocks. Otherwise, you’re taking a gamble.

“Can you tell me the one about long-term investing? That puts me to sleep the best.”

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Market View - Steady On

The Artificial Intelligence (AI) boom is in full force. But we are finally starting to hear more concerns of a bubble. A recent study from researchers at the Massachusetts Institute of Technology reports that 95% of businesses that have tried using AI programs report finding little financial benefit. And electric and water use for all the data centers currently planned is far beyond current capabilities. Yet spending continues apace. Five of the big technology companies currently spend about $400 billion per year, mostly on data centers. This is typical for a new technology. Expectations can become untethered from reality. For the record, we think AI will bring significant changes to our lives, but on the order of other technological advances. We don’t view it as a once-in-a-lifetime sort of advancement.

Many of us have heard the quote from Warren Buffett that he likes to be greedy when others are fearful, and fearful when others are greedy. With the AI boom, and with the casino nature of the stock market (see Portfolio Issues), we think many are greedy right now. It’s a good time to step back, be more cautious, and make sure you have the cash you need for the next couple of years. To be clear, this is not a subtle message to sell everything you own and go to cash. That’s the path of market timing, which is really another form of gambling.

Nor is it a recommendation to buy gold. We hear a lot of people recommending gold as an investment these days. Some recommend a lot, some a little. For the doomsday crowd, gold has always sounded attractive. Although in a doomsday scenario, we don’t know what you’d do with your gold other than hit someone over the head with it. For the slightly-worried crowd, who recommend five or ten percent of your portfolio in gold, that strikes us as not overly helpful. That amount won’t make or break a retirement plan. We think people are talking about gold because the price has gone up so much. But history shows gold makes for a terrible long-term investment. Gold, diamonds, and other precious items have always been attractive in underdeveloped financial systems. That doesn’t apply to the US.

We do think government bonds contain more risk than they have in the past. For the last 50 years, US bonds have been a good store of value. But with the high levels of US debt, with continued deficit spending, and with some question about the future independence of the Federal Reserve, the future value of US bonds now has some question marks attached to it.

No matter where finance folks fall on the political spectrum, most of us don’t want politicians having control over the Federal Reserve. The Federal Reserve has built its reputation as an inflation-fighter over many years. We do not want to give that up casually. Earning it back will cost dearly. Politicians will almost always choose economic growth over keeping a lid on inflation because politicians make decisions based on a relatively short time horizon—the election cycle.

Remarkably, the bond markets don’t seem overly upset about these risks. Long-term rates have held relatively steady. They should rise if investors start to think that the risks to US bonds are rising.

We write this Market View piece to let you know what we see, and to give you our opinion of how the future might unfold. We know that the world is full of surprises, so you’ll notice that we don’t make definitive statements about what will happen. That’s an impossible task.

Given the uncertainty, we recommend that you stay steady through the inevitable ups and downs of the markets. That’s the way to build wealth over time.

Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group, Schwab