The Stock Market Isn’t a Great Big Gambling Machine

“The world is a mess”

“China’s stock market: a crazy casino”

“The stock market isn’t trustworthy”

“Don’t catch a falling knife”

“Get out of the market”

What you see above aren’t actual quotes, but they are sentiments that have become increasingly common recently in the financial media and local investment blogs alike.

Some of these sentiments have even turned up on the Motley Fool Singapore’s own Facebook page. Taken together, the Singapore stock market can be made to sound like a giant casino rivalling the ones in Marina Bay or Sentosa.

I would beg to differ on the sentiments shared above. To make my point, I would like to share a story which I believe can give the right perspective.

The “Great Big Gambling Machine”

In particular, the “casino” label that’s slapped on the stock market reminded me of a story involving Tom Gardner, the co-founder and chief-executive of the Motley Fool.

Sometime back in 1995, Tom visited a local bar in the U.S. after a long hike. At the time, a big fellow – clad head-to-toe in leather biker gear – sat next to Tom and introduced himself as a “Harley Guy.”

For those who may be unaware, the biker was referring to Harley-Davidson Inc, a US-based maker of its popular namesake brand of motorcycles. The popularity of Harley-Davidson was evident from the way the biker identified himself.

Naturally, Tom returned the favor and introduced himself. Upon learning that Tom is the co-founder of an investing website, the biker recounted his own story of how he lost almost all his money in the stock market many years prior by following the advice of a stock broker he barely knew and investing his capital in a company he didn’t understand.

The biker even labelled the stock market as a “Great Big Gambling Machine.” This was his conclusion from his own painful experience.

But Tom was not easily convinced. He asked the biker if he ever considered investing in his favorite motorcycle brand, Harley-Davidson. It turned out that the biker was unaware that he could actually invest in the motorcycle company which he loved (Harley-Davidson was at that time, already a public company).

If the biker did invest in Harley-Davidson after meeting Tom, his impression of investing would likely be very different now. That’s because from the start of 1995 to today, shares of Harley-Davidson have risen by more than 1,500% as a result of a near-eightfold jump in profits from US$113 million in 1995 to US$845 million in 2014.

Harley-Davidson’s return is the type that may just change the biker’s opinion about investing in stocks for the long-term.

Lessons from the story

By now, we know the biker is a big fan of motorcycles. And yet, when it came to investing, the biker chose to put his money with someone he didn’t know who in turn put it into something he didn’t understand.

Thing is, it didn’t have to be that way.

The biker could have made it much easier for himself if he had kept to something that he could understand better – like motorcycles or Harley-Davidson – and stayed away from less-familiar companies.

Examples of companies which are likely to be easy enough for anyone to understand are all around us if we actually pause to take a look. For instance, the Guardian, Giant, and Cold Storage outlets in Singapore are helmed by Dairy Farm International Holdings Ltd (SGX: D01). In a similar vein to Harley-Davidson, shares of Dairy Farm – a Pan-Asian supermarket and hypermarket retailer – has returned a satisfying 770% in capital gains since 1995.

Foolish summary

The stock market becomes a casino when we treat stocks like pieces of paper to be bought and sold willy-nilly. In the bizarre scenario of stock market participants buying and selling without looking at the business behind the ticker, we may be leaving our fortunes bobbing around with the daily gyrations of the stock market.

And yet, as Tom would point out, if we keep our eyes open and invest in the good companies that we know and love, we can stand a better chance of improving our financial future.

For more investing analyses, insights, and important updates about Singapore's stock market, sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Dairy Farm International Holdings.