Investing vs Gambling: Are You An Investor, Trader or Gambler?

by Silicon Valley Blogger on 2011-01-1610

How many of us have spent some time in Las Vegas to try our luck? Most of us probably know enough not to overdo it, making sure that we only bring along the amount of money that we are okay with losing. Why? Because odds are, we won’t be coming home with the same amount of money we left with. If you’re one of the lucky few, you’ll come out ahead. But most of us will come home a few bucks lighter than we started out.

First time investors often find themselves wondering what the difference is between straight up gambling and investing in the stock market. Let’s start with the dictionary to get some clarifications. Merriam Webster defines gambling in two ways:

1. Playing a game for profit (money or property)
2. Betting on an uncertain outcome

Isn’t this the same definition most of us can apply to investing — the idea here that we put something out there in order to make a financial gain? And aren’t we really trying to predict the future? I think that most of us would like to think that investing involves more than just a little luck when it comes down to making some cash, but I wonder just how many people are investing on just a wing and a prayer to Lady Luck?

Investing vs Gambling
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Investing vs Gambling: Are You An Investor, Trader or Gambler?

In order to understand the difference between a true investing strategy and simple gambling, let’s take a quick look at some of the different players (or types of wayward “investors”):

Socially Motivated Investors: Following The Herd

These are the folks that dive into investing because everyone else is doing it. These are the same people who would jump off the bridge, after someone else who’s done so. Well, okay, I’m exaggerating here, but you know what I mean. These are the very same people who buy the LCD big screen, purchase the Lexus, and install the swimming pool just because Mr. Jones across the street did. Such a person typically knows absolutely nothing about the market or even basic investing for beginners and is, in every definition of the word, a gambler. He would rather take a gamble with his cash than to look bad in front of his peers. The good news is that these guys are the masters of imitation. They tend to hide their lack of knowledge behind the investment strategies of their peers, which might actually work out for them — at least, if their peers are investment savvy. I guess the question here is whether we are simply following the actions of the herd, or whether we are actually thinking independently and basing our decisions on our own requirements and risk profiles.

The more you know, the more independently you can make decisions. You can get a lot of free information from some of the best online stock brokers in this list. They offer some opportunities for free investment education (via webinars, tutorials, tools and articles).

Adrenaline Junkies: Chasing The High

These are the people who get into investing simply for the thrill of the chase. They live off the highs and slog through the lows, chasing returns. There is rarely, if any, discipline, analysis or strategy that direct their investing, as they choose instead to buy or sell on a whim or use some hot tip heard on a forum or television show. These guys might actually be some of the riskiest investors/gamblers out there as there is absolutely no rhyme or reason to their investments whatsoever. At least, socially motivated investors attempt to mimic what other investors are doing, but adrenaline junkies are too erratic to be considered investors at all.

I recall the investment period known as the dot com era, when everyone and their brother invested in the stock market. While a lot of folks then were simply following the herd, others were performing stock trades, chasing higher and higher prices. They were following the momentum, which at that time, was consistently on an uptrend. As these investors and traders found themselves minting money hand over fist, they got increasingly bolder about the risks they were taking and the moves they were making. I found myself arguing with many such “investors” about the risks they were taking in the market, but they pooh-poohed my concerns — they were addicted to the market and couldn’t accept that anything could go wrong. Unfortunately, they were the same people who found themselves losing their shirts when the dot com bubble burst.

Emotional Investors: Deciding With The Heart

There are people who are hybrids, displaying the characteristics of both investors and gamblers. They are armed with just enough knowledge to be dangerous. Most successful investors know that the key to success is to master a few good strategies and to be committed to executing those strategies, no matter what. But some folks are emotional investors: they know a little bit about a lot of strategies and decide that the best way to make money is to switch strategies in mid trade. The other aspect of this type of investor is that in many cases, they fail to admit when they are wrong. They hold on to bad investments hoping for a turnaround instead of understanding that sometimes, a loss is a loss and that good investors are sometimes wrong. Holding bad investments for too long turns what could have been a savvy investor into a gambler (in this case, one that ignores all signs that a position is a bad one, and who would therefore take the gamble that things will recover at some point).

The bottom line here is that in order to be a successful, rational investor, we should learn how to stamp down our natural gambling tendencies and invest with our heads and not our hearts. We have to understand what it is we are investing in and how we are approaching the investment. The approaches we take have to be methodical and disciplined. Thus, we should be able to admit when we’re wrong, and to cut our losses when it makes sense to.

Copyright © 2011 The Digerati Life. All Rights Reserved.

{ 9 comments… read them below or add one }

Karl January 16, 2011 at 11:26 pm

There is not much difference between a gambler and a trader. The decisions of both these kind of players are based on inside information (which is rarely true), and put in money for short term. However, in long run, whichever stock you choose (with sound financial statements), returns would be decent.

LifeAndMyFinances January 17, 2011 at 5:02 am

I consider gambling a short-term emotional decision, and investing a long-term rational decision. Those that gamble want to get rich now! Not in 40 years. That’s why it’s become so popular in America – we just can’t wait for anything these days. Investing is for those that are responsible and understand the need to money in the future.

I believe that I am an investor, but have really only just started. I have many years of investing in front of me, but I’ll make sure to have some fun along the way!

DIY Investor January 17, 2011 at 7:21 am

To me gambling is where a risk is created where there is none. We bet which fly will fly off the wall first. We decide to play poker. We bet on whether a ball will land on a red pr black square.
Investing on the other hand is about responding to risks that are there. One day you will turn 65 and you may or may not have choices. If you own companies by investing in stocks or buy real estate then you are taking steps to handle this risk.

Kevin Jordan January 17, 2011 at 8:43 am

Great article! We feel that anyone who tries to predict the market is simply a gambler. We try to follow the market and make quick decisions. Our blog often covers some of these topics. Your reader may enjoy it.

Glenn G. Millar January 17, 2011 at 1:36 pm

Going to Vegas is not a gamble. I just got back from Vegas. Gambling implies that there is some chance of winning. I am able to predict with 100% confidence that I am going to lose. I am rarely wrong.

Clay Ivy January 17, 2011 at 3:22 pm

It is important to make a distinction between an investor and a speculator. Many things make up the difference but one of them is certainly time horizon. With the exception of abritrage situations, anticipating short term price changes (like day traders do) would have to be considered speculative. If you are speculating, you are gambling. Rember what Warren Buffett taught us. The first key is not to lose.

krantcents January 17, 2011 at 4:13 pm

Although there is risk to investing, there are ways to reduce that risk by asset allocation and diversity. I rarely gamble and never confuse it with investing.

Squirrelers January 17, 2011 at 4:33 pm

Many years ago, when I was back in high school (a LONG time ago), a friend made the observation “the stock market is just dignified gambling”. I didn’t disagree then, though I knew very little about personal finance.

Today, I still can’t totally dismiss his comment. It’s more informed than gambling, of course, and is a cornerstone of people’s financial plans. Historical data generally indicates positive results for equities, for example. However, with equities and other financial vehicles, there is often a high degree of volatility and unpredictablity. So, while investing in stocks is not quite gambling, it’s a 2nd cousin of it for typical investors.

Brijendra Dharampuria January 20, 2011 at 11:53 pm

I am an Investor and Trader but not Gambler. According to me there is much more risk in gambling than with investments. There is also risk in investment but you do not lose your money suddenly, it offers the chance to take recover from losses if we take good business decisions. But gambling is just not a good idea.

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