To Win on Financial Markets, Know the Difference Between Gambling and Investing

Before you buy/sell an asset, you should be clear on why you are doing so. Is it that an asset price is rising and you buy in the hope of making a quick buck? If this is the reason for your purchase but you cannot sensibly identify what’s pushing up the price, I call this gambling, not investing. Your action is based on the hope that you will gain but not informed by any analysis of what will cause the gain.

Far too often I have met people who get into assets for no deeper reason than: all my friends are getting into this; look how much its price has been going up; a relative (with no record of excellence in investing!) told me I should buy. These people are brave gamblers.

When the price of gold was rocketing up a few years ago, several persons asked if I wasn’t joining the gold craze. I asked them to identify specific factors driving the price of gold. The only response two of them gave was: “Well, it has been going up so much. I can’t imagine it wouldn’t go up more. If you don’t get into it, look how much you could lose.” They were gambling, not investing.

When you are investing (buying, selling, selling short, etc.), you will always be able to specify what you think will influence the price of the asset. You may turn out to be wrong and might have to change your investment. But the point is, you will not just be leaping in the dark in the hope of landing in a grand place. You will be learning to identify what drives asset prices and, hopefully, with experience and thought, become better at it.

For example, when Apple announced its earnings on Jan 27, 2014, its stock price fell sharply. Suppose I had bought shares of Apple, thinking that because the share price had fallen so sharply, it was definitely going to recover. Unless this belief was rooted in technical analysis and/or a lot of experience with how Apple’s stock price would bounce back up, I would call this purchase a gamble.

Suppose, however, I had bought Apple well aware that its earnings weren’t great, but based on clear indications that it would be creating new products that would push up the stock price. This purchase would not have been based on just a wish or hope. It is what I call investing.

There is usually an abundance of information on the internet on what influences asset prices. A little research and a willingness to think can tell us what is likely to drive an asset price. If we are unwilling to do this research and analysis, we may be better off not risking our hard-earned money.

We are always told that the odds of winning in casino gambling are typically very low. If we view the financial markets like a giant casino, we should not be surprised if we lost badly.

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