Is stock investing really gambling in disguise?
I do remember vividly of one instance when I was discussing investment with a dear friend of mine.
When I mentioned the word ‘stock’, he straight away got a bit wary and defensive and commented, “Isn’t playing with stock no different from gambling? And not to mention it is a high risk game as well? If I make just one wrong move, I’ll be in deep shit right?”
Reflecting back then, I think there is still a perceived notion that dabbling in stock is equivalent to gambling. I don’t really blame my friend for that statement. He had a bad experience where his dad lost a pile in the stock market. Must be traumatizing for him.
Yes while I do admit, getting involved in stocks can be like gambling in certain cases, to equate both of them together will be to do injustice to all the careful and rational investors who do their due diligence out there.
All too often, we hear of people losing a fortune in the stock market. When you really examine why is this so, the familiar old reasons come out. There are many, but I will just pick 1, which is
Listening to the hot tips.
This is the no. 1 killer. Far too often people love to listen to the latest hot ‘tip’, hoping to make a quick buck.
Tipster will always tell you which stock to buy. But do they ever tell you when to get out?
Many give tips because they want others to get into it, and in the process, helping to push up the price. When everyone is all happy and comfortable with the sky high price, reveling in self-congratulations, the tipsters will then dump it all and take profit.
Who suffers? The suspecting fellow who listens to the tip and happily went in on the high, but not knowing what hit him later. When he finally does realized, his pants are probably gone by then!
I could on and on about other reasons but I think I will leave that for another day.
In truth, stock investing and speculation/trading is all about mathematics. To be more precise, probabilities.
No one, not even the greatest investor out there, can truly say that he is right 100% of the time. Not even Warren Buffett. It is just not possible. If you can find one, please tell me. I will be the first in the queue to be his disciple.
Back to my point of probabilities, in investing/trading/speculation, you have the power to choose which stock you want to buy as well as when you want to enter and exit a trade/investment. If these actions are done properly and rationally, it can greatly increase your odds of winning. Coupled with a sound risk management/cut loss/take profit plan, the downside risk can be further mitigated and minimized.
Speaking about getting your odds in your favour, what does it mean for you? Actually it’s a rather simple concept. For example, if out of 10 times, you make 6 winning calls, in the long run, you will still be in net positive territory. That will happen only when you get your odds right, and you should be striving for it, everytime!
That said, how much you win when you make a right move, and how much you lose when you commit a mistake, is much more important than being right more often than wrong.
Why is it more important than being right most of the time?
Let say you make 4 winning calls instead of 6 this time round, but you manage to score big on all 4 winning calls and at the same time limiting the 6 losing calls to small ones, then you will still be on the right positive track in the long run.
How to get about doing this? Simple. Firstly, stick with your winners and let your profit run. Secondly, cut the losers! This is all about risk management. Many losing investors (gamblers?) do the exact opposite – sitting with losers and cutting the winners.
If we can get the probabilities right, going in with the odds in our favour, together with the right risk management, it really isn’t so risky right?
The same can’t be said of gambling. When you gamble, you are already at the wrong side of the odds, as the house edge is already against you.
As the saying goes, “Making a living from gambling is easy - if you are a casino.”
Many gamblers will probably tell you their rare success stories. Ask about his losses, and he will most likely keep mum and scurry away to one quiet corner. For the vast majority of the time, unless you are a professional gambler who can calculate the odds real well (these people are few and far between), the whole affair is a losing proposition in the long term.
You want some hard core statistics as proof, go to British Columbia’s partnership for responsible gambling to give yourself a sobering wake up call and see how much the odds are stacked against you,
So, as you can guess, gambling is a big no-no to me. It should be for you too. And no way is stock investing or speculation always equivalent to gambling. I rest my case.
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