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Monday
Feb072011

Gambling vs. Investing

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I have had a lot of conversations the last few days about what the stock market really is and I thought it was worth talking about here. The accusations that I have bumped up against is that Forex and equity markets are no different than throwing the dice at the Craps table or a hand of Blackjack. I wanted to try to outline how different gambling is to savvy investing and saving for your future. I want to say though that, responsibly, I do enjoy letting off a little steam at a casino with funds that I have already allocated specifically for this. Please do not go gambling out of your savings or checking account when you have bills to pay or things that you are actively saving for.

First let’s define gambling in really broad terms. Gambling is wagering money or something of value on an instance where the outcome is determined solely on chance. Obviously when you are gambling you are placing your wagers with the hopes that the results of your chance endeavor will land in your favor and offer a payout. The payouts on different games are all different based on the chance of choice outcomes, which are mutually exclusive mostly, occurring. The rarer the occurrence the greater the payout, usually. There are general strategies with some games like in Black Jack, Craps, Poker, and Baccarat. People use systems and try to pray on the weakness of their opponents, if they are other players, or the rules that dealers must adhere to - like in Black Jack having to hit on a 16 and less. In some instances a players choice can have some effect on the probable outcome but at the root of the games they are intrinsically chance.

While there are some similarities to gambling and investing in equity there are lots of differences that can keep savvy investors from making bad bets. Yes, there are multipliers and “odds” or ratios that should be taken into consideration when you are fundamentally evaluating a position. Yes, there is an element of chance in trying to predict future behavior. Is it as random as the role of a dice or the flip of a hole card - no!  What’s different firstly is the availability of information. From currencies to companies like Google and Apple you can get almost up to the minute information on what they are doing, where they have been, and where expert analysts think they are going. Another place that savvy investing differs is your time horizon. You can be in positions as long or as short as you’d like to be. I hate rule of thumbs but odds are the longer you are in the market the better chance you have at riding out the ebbs and flows and capturing capital appreciation. When you are investing there are also varying levels of participation. Do you want to be a day trader or are you buying mutual funds where the funds manager has the primary responsibility of seeing his fund(s) do well? Like in gambling you should have a plan or an overall strategy but another big difference is that you don’t actually have a real loss or gain until you move out of your position.

One of the biggest quips that you will read about if you search gambling vs. investing is that in gambling the odds are always in the houses favor and in investing you can tilt the odds are in your favor. I like this statement because if you do your homework and evaluate every play you make in the markets you have the ability to tilt in your favor. Can you close your eyes and pick blindly or over diversify so much of your risk away that your gains don’t outpace inflation - absolutely!

I encourage you to take a look at the few posts that I put together a while back about technical and fundamental analysis. Even check out the book review I did about what your advisors don’t know. I’m sure that after those you’ll see that it’s not just gambling when you take your financial situation seriously and make your money work for the future that you want.

This is not a complete list by any means. I wanted to toss it to all of my awesome readers out there. In comments feel free to leave your two cents. Do you think this market is as good as hitting the casino? How are you weathering this tempest of volatility?

 

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Reader Comments (5)

The thing about FOREX is that it is zero-sum and for newbies it can be dangerous as they are up against big players. I don't think it is gambling per se but I would still recommend someone start out small if they are trying it out.

February 9, 2011 | Unregistered CommenterInvest It Wisely

I absolutely agree! I've been testing my investing prowess in Forex a bit these days. It's really a volatile market that you have to be all over when you are in and out of it. It is proving to be pretty fun though :) For someone who doesn't have any experience at all in active portfolio management it can be an extremely dangerous place - like always talk to professionals about it or at the very least do lots and lots of homework!

February 9, 2011 | Registered CommenterNunzio Bruno

Thanks this post..
keep writing your blog will be more attractive. To Your Success!

March 1, 2011 | Unregistered CommenterBPL Papers

It's a quite interesting post.

February 9, 2012 | Unregistered CommenterBook of ra

It's a quite interesting post.

February 9, 2012 | Unregistered CommenterBook of ra

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