Gambling Or Investing

Posted : admin On 4/4/2022

Peter Lynch once said, “When people discover they are no good at baseball or hockey, they put away their bats and their skates and they take up amateur golf or stamp collecting or gardening. But when people discover they are no good at picking stocks, they are likely to continue to do it anyway.”

In traditional sports, it’s easy to measure if you are good based on batting average, goals scored, or other statistics. In the stock market, some investors seem to believe their next great stock idea will be the big winner that makes up for all of their losers. The question every investor needs to answer is…are you investing or gambling?

The difference between investing and gambling isn’t always clear cut. Both involve risking money for potential financial gain. Some professional gamblers have tried and tested systems, while some. Gambling is defined as staking something on a contingency. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many traders are gambling.

What is Investing?

According to one definition, investing is, “the act of committing money or capital to an endeavor with the expectation of obtaining additional income or profit.” What this definition lacks is the real difference between investing and gambling…research. Unfortunately, there is a huge crowd of amateur investors that ignore Peter Lynch’s sound advice, “a share is not a lottery ticket…it’s part ownership of a business.”

Many “investors” think investing in the stock market is like walking into a casino. They throw money at a stock, or a basket of stocks, based on a rumor, tip, or something they believe. They do very little research (if any) into each company, and many times, they lose just like at a casino. For the amount of “investing” they are doing, they may as well have gone to Atlantic City and bet on number 13 at the roulette wheel.

While gambling involves random chance, investing requires some research. Lest anyone get intimidated, this type of research doesn’t require a PhD, and in some cases can be done in a short amount of time. If you are interested in a company, the first place many real investors should go is the company’s most recent quarterly report. Beyond this, analyzing things like the company’s last annual report, balance sheet, cash flow statement, and income statement can be instructive.

More thorough research, might involve reading the company’s last few conference call transcripts, and even calling the company to ask questions. Finally, the investor might look at some valuation comparisons of the stock compared to its industry peers, or historical norms. Unlike pulling the handle on a slot machine, in the stock market, a little bit of research can increase your chances of making money significantly.

Timing is Everything…or is it?

An additional hurdle that many investors must try to overcome is the idea that some people are born market timers. The truth is, there is no such thing as an investor who is consistently great at timing the market. Investors do their research, and attempt to pay a fair valuation based on their assumptions. Real investors ignore the market and focus on the company.

A few case studies are instructive, to show how an investor can either make or lose a lot of money by trying to time the market. First, let’s say you believed in October 2011, that Netflix (NASDAQ: NFLX) was going to be the king of online video. The stock was valued at a split-adjusted price of around $12 a share. You decided to invest $10,000, and purchased 832 shares. Today, that $10,000 investment is worth more than $80,000, or an annual rate of return of just under 70%.

However, let’s say you decided to buy into Netflix a bit earlier in July 2011. With the same conviction as the first investor, you bought shares when they were at $42.16. Just a year later, you get nervous because you’re losing money. Rather than focusing on the company, you abandon your investment a year later at $8.42 a share, a negative 34% annual rate of return.

The difference between the investor who made a huge profit in Netflix, and the one who suffered significant losses was patience and conviction. Netflix’s financial and operating profile didn’t change, the stock market simply mispriced the opportunity in 2012.

In the second scenario, an investor decided that Keurig Green Mountain (NASDAQ: GMCR) would change the coffee industry forever. In October 2011, the company’s stock was around $71 a share, and this investor chose to buy $10,000 worth. That same investor has been on a wild ride over the last few years, and has witnessed their investment decline to about $7,800. With an annual rate of return of negative 6%, the company has some challenges and the market seems to be pricing these issues accordingly.

That being said, an investor in December 2010, might have thought that Green Mountain was a great company as well. With the stock at $32.50 a share, the investor decided to buy. Just nine months later, Green Mountain’s stock was riding high at $108, and the short-term investor sells out with an annual rate of return of nearly 400%. This investor might believe that Green Mountain is one of the best investments they ever made.

The Answer

The point is, in the short-term, a stock can move up or down without correlation to the strength of the business. Over the long-term, investors might experience volatility, as stocks move based on supply and demand – not necessarily intrinsic value.

The bottom line is, if you’re a gambler you’re probably better off taking some of your money and having fun in Las Vegas. Hopefully you’ll have enough left to take your serious money, and put it in the hands of a qualified financial advisor.

However, if you’re interested in becoming a better investor, do some research into the company or companies you are interested in. When you’ve decided to put your money to work, make sure you keep up with the story and buy or sell based on the strength of the business. Sometimes, the difference between gambling and investing is a little bit of research, and the stomach to stick to your playbook.

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Stock Market Gambling Or Investing

There are a few differences between investing and gambling, but people who don’t know the differences argue that they are the same. We will take time to compare them so that an investor can know when he is gambling and when he is investing.

Let us start by looking at their dictionary meanings. In literary terms investing is an act of laying out money or capital in an enterprise with the expectation of profit. It is important to stress at this point that investing requires an investor to take calculated risk.

Someone might ask that if investing requires an investor to take calculated risk, then what’s the reason behind the failure of some investments? This is a question that people will never stop asking because the fact remains that some investments will still keep failing.

So what is the answer to this? The reason some investments fail is due to the fact that some investors refuse to do due diligence in any area they choose to invest. Due diligence is fact-finding that helps an investor take calculated risk.

For instance, an oil and gas expert who has spent all his years in that sector now chooses to diversify into investing in agriculture. If he takes a decision based on his basic knowledge in agriculture he might go wrong. And such investment might fail.

He is supposed to consult with an agriculturist who will advise him on what to do and how to do it. In fact, it is advised to employ the services of a consultant in any area of agriculture he chooses to invest in. The same goes for someone who wants to invest in stocks; he is advised to employ the services of a stockbroker.

Investments fail sometimes because investors do not carry out due diligence in areas they choose to invest. Although, there are other reasons which may be beyond their control, such as uncontrolled circumstances like change in weather, and so on. But, it is important that I stress on the factors that can be controlled on the part of the investor.

So what then is gambling? Gambling literally means the act of playing for stakes in the hope of winning. It could also mean the act of taking a risk in the hope of a favourable outcome. It is important that we take note of the word “hope”. The word “hope” simple shows that such risk is not calculated but a reckless rick. It sometimes may work in the favour of those that chose to gamble, but it can also go in the other way.

How do you know you are gambling and not investing?

1. Gamblers are always open for any outcome I mean, both positive and negative, so they are usually not surprised when they lose out.

2. Investors are positive minded, because they know they have taken their time to study and understand the trend; they are sure of their outcome.

3. Investors take calculated risk, while gamblers take reckless risk.

4. Gamblers are only playing a game of chance, while investors are following trends that are proven.

5. Gambling is addictive while investing is decision based on opportunity.

6. An investor studies a prospectus that contains facts which help him make informed decisions, while a gambler is only excited by an ample outcome that could sometimes be deceptive.