Warren Buffett has made no secret about how he feels about gambling, and he especially warns investors against treating the stock market like a massive casino. From time to time, he has warned against taking on margin debt, or buying stocks with borrowed money, and piling on exotic investments.
Gambling in the stock market
In an interview with CNBC in February 2018 (via USA Today), he said many people "like to gamble in the stock market." He described such a habit as "insane," adding, "To risk starting all over again and losing everything is madness."
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Buffett has long advised against borrowing money to buy stocks, which is exactly what many investors do. Data from the Financial Industry Regulatory Authority (FINRA) reveals that investors have picked up their wagering on stocks by borrowing money to buy them. As of August, investors had racked up margin debt of more than $645 billion, which is approaching the record of $665.7 billion set in January 2018.
The problem with margin debt is that in the event of a margin call, investors are forced to sell all or some of their portfolio to pay for the debt they took out to buy stocks. Margin calls occur when the price of a stock you borrow to buy suddenly plunges, leaving you liable for the debt you took out to buy it.
Get rich slowly
Buffett said in the CNBC interview that there's no reason to gamble on stocks using margin debt "unless you are in a hurry to get rich and willing to go broke."
He also said other ways investors were gambling was with cryptocurrencies like bitcoin and with index funds that bet on market volatility instead of a company that sells products that are in demand and turns a sizable profit.
"There are ways to get rich slowly," he told CNBC.
"A tax on ignorance"
Buffett's advice to investors not to treat the stock market like a casino is further strengthened when you understand how he feels about actual gambling. Buffett described gambling as "a tax on ignorance" during Berkshire Hathaway's 2007 annual meeting.
He once installed a slot machine in his home and tested his children on it by giving them their allowance in dimes. He said he had all of their allowance back by the evening on the day in which he gave it to them, which illustrates how easy it is to lose while gambling—whether it's on the stock market or in a casino.
Buffett believes that since humans tend to enjoy thrill-seeking, it may be why so many people like to gamble. However, it's easy to get in trouble by gambling by taking on debt to buy stocks, as many investors have found when they've fallen victim to a margin call.