Do Active Investors Have a Gambling Problem?

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Index Fund Advisors’ 12-Step Recovery Program for Active Investors suggests that active investing is to varying degrees a disease akin to alcoholism, drug addiction, or gambling addiction. While we certainly do not say that all active investors suffer from an addiction that requires treatment, we have seen quite a few that approach the market as they would a casino. Remember that Jim Cramer's book from 2002 was titled Confessions of a Street Addict.

Active investor's portfolios tend to have very high turnover, and they lack any semblance of diversification. When asked why a particular position was purchased, the answer usually boils down to a hunch or a feeling that it was on the verge of skyrocketing. Usually, the position is purchased after it has gone up and has been noticed by the talking heads of CNBC. As Warren Buffett said, “The dumbest reason in the world to buy a stock is because it is going up.”1 Of course, the same is true for all other investments, including index funds.

Keith Whyte, executive director of the National Council on Problem Gambling, said people who have let stock picking and gambling spiral into a disease are seeking the same thing––a continuous jolt they are loath to give up.2

Gamblers Anonymous recommends total abstinence for stock market addicts. “Turning over control of your investments to a spouse, relative or professional financial planner is an important step towards recovery…The more distance there is between the investments and the compulsive gambler, the stronger the recovery will be.”3

Below are eleven warning signs developed by San Francisco clinical psychologist Paul Good.2 While Dr. Good, who specializes in stock market addicts, says that anyone who exhibits five or more of these signs may have a gambling problem, we believe that even one of these signs should be cause for concern and even alarm.

As the head of the Gambling Disorders Clinic at Columbia University, Dr. Carlos Blanco has extensive experience with gambling addicts (including the Wall Street variety), and he says one difference between obsessive investors and chronic gamblers is the age at which the disease is most prevalent. Pathological gamblers are typically in their late teens and early 20s while people who play the stock market to destructive excess are commonly in their 30s and 40s.2 This makes a lot of sense because for many younger people, the stock market is simply not on their radar.

 If you believe you have a gambling problem that is expressing itself through playing the market, we advise you to seek help immediately. Gamblers Anonymous is a great place to start or you could read Index Funds: The 12-Step Recovery Program for Active Investors.


1http://www.quoteswise.com/warren-buffett-quotes.html (retrieved on 5/6/2014)


3http://www.angelfire.com/mi4/prgmi/stocks.pdf (retrieved on 5/6/2014)