Have you ever felt that investing is like gambling? You put your money down and you take your chances. Right? Well…….it can feel like that. And it can actually be like that. But it does not have to actually be that way.
Like gambling, investing entails risk. This is true whether you invest passively or actively. Nobody can make that go away. But if you are an investor, you have a distinct advantage over gamblers. If you play your cards right (get it?) you can be the “house” and stack the odds squarely in your favor.
I’ll explain exactly how to do that in a minute. But first, let’s get our terms straight. Here is the definition of gambling according to Wikipedia:
“Gambling is the wagering on an event with an uncertain outcome. Typically, the outcome of the wager is evident within a short period.”
And here’s how they define investing:
“Investment is putting money into an asset with the expectation of capital appreciation, dividends, and/or interest earnings.”When you read that, what differentiates the two words? Here’s my take:
1. When you gamble, you bet on a one-off event and you have no reasonable expectation of gain. Your money is not safe. You only have hope. You haven’t done any work and you haven’t purchased an asset. Your potential gain is purely a function of chance. And in most cases, your chances of winning are pretty low. Last, you learn the results of your gamble almost immediately.
2. Investing is nothing like gambling. When you invest you do have an expectation of gain over a long period of time. And if you are realistic, you understand that you have to do your homework in order to have that expectation. There is an element of chance of course. But you can shave down those risks by investing strategically (based on a solid investment strategy and good research) in assets.
Now that we’ve defined our terms, let’s look at tactics that can help you load the dice to always come up 7 or 11:
A. May The Force Be With You
Every January I give a presentation about the economy and the market. Although I don’t have a crystal ball, I talk about the forces at work in the economy and market and how those forces may manifest over the coming 12 months.
Again, my goal isn’t to predict the market. My objective is to help people understand what the various economic forces are and how they might play out during the year.
Ever since I started doing these talks, I’ve noticed that the people who attend are far less anxious about their money during the year. That’s because they understand what is happening. When the market drops and you have no idea why, it can be frightening and it can lead to emotional reactions. But if the market drops and you have some idea as to what is going on, it’s easier to stay the course.
So the first order of business for you is to learn a little about what is happening in the economy and stay up on it. One easy way to do that is to subscribe to this blog but it’s clearly not the only solution. There are plenty of great resources available on the net. Just give yourself about 15 minutes a day and you’ll be a regular Milton Freedman in no time.
B. Expect The Unexpected
There are always positive and negative surprises that are just impossible to anticipate. Don’t let those surprises shake you out of your investment strategy. If you are a buy and hold investor, stay with the program. If you adjust your portfolio based on market conditions, employ your strategy.
C. Casinos Have No Clocks
If you have ever been on a casino floor, you already know that there are no clocks on the walls. That’s because the House wants you to keep on playing as long as possible. Since the odds are in their favor, they’ll clean you out if you play enough hands.
If you want to switch places with the casino owner, you’ve got to pull your clocks off the wall too. A good investing strategy will pay off over the long run. But if you are looking for quick wins, you are speculating and gambling. That’s not to say you won’t throw down a full house once in a while. But that kind of strategy isn’t investing and it isn’t a long-term winning hand.
D. Remember, the House Pays Out Too
You can’t win them all Pilgrim. You won’t make money on every investment you make. You have to accept and anticipate losses.
As you can see, gambling and investing are very different. Gambling “success” depends almost entirely on chance. When you invest properly and over the appropriate time frame, chance has almost nothing to do with your results.
Do you feel like investing is just gambling? Why?