A lot of investment advice talks about betting on value. Even the most traditional and reputable analysts sometimes use the term when recommending stocks. While there are some similarities between deciding to buy stocks and gambling, investing is not gambling in the best UK bookmakers.
You have probably heard more than once that “investing” is like playing the lottery. In fact, there are many people who still use a particular expression for it: ‘playing on the stock market’. Although there will still be some who maintain these terms, we want to explain why investing in the Stock Market has nothing to do with gambling.
Investing VS betting
- The purpose of both activities is to make money: while there is the possibility of loss, the purpose of both is to increase our wealth.
- Usually you decide in advance (or should do) what risk you are willing to take and how much you are willing to lose.
- There is an important psychological component, both in the emotions that both activities can evoke, and in the stress and the ability to withstand the pressures required for decision-making.
- Investing should not be equated with gambling. When betting at the casino, the law of chance applies, so the option chosen is as good as the others.
- It’s easy to understand that investing shouldn’t be like this, but there are better alternatives, at least in theory.
- Obviously, even with a good method, it’s hard to get it 100% right. Since it’s all about getting our money back, the goal is to do right rather than wrong, and (related to the above) know where our limits are.
You are buying value
When you bet, you get nothing. In other words, it touches the possibility of something more or less. However, if you make an investment (you buy an asset -such as a stock- you can get a return on it in many ways: through dividends, through buying and selling, through rent, etc.), that investment can provide returns for many years.
Investments must be based on information
When you bet or play the lottery at a casino, we only rely on chance, it’s a matter of probability. However, when investing, we should trust on the information. The two main streams of investment research -technical analysis and fundamental analysis -each in its own way- are based on data.
Investing doesn’t happen randomly, by fashion or coincidence, investing is there for a reason. Benjamin Graham, one of the gurus of fundamental investing and Warren Buffett’s teacher, said, “An investment operation is an operation that promises to guarantee the safety and reasonable return of the main asset after a thorough analysis.”
Speculation VS investment
While some investors are clearly speculators, it is also true that those who bet at casinos are not investors at all. Although they use a mathematical system to optimize the odds, they are looking for a lucky win, and hopefully in the short term. Investors who think of themselves as such do not like to speculate and mostly aim for mid -to long-term profits.
As they say, even if someone has a betting craze or employs some technique to try and exploit the stats, the house always wins. That’s the odds against those who bet from the start: there are 18 red numbers, 18 black numbers and 0 in the roulette wheel, and the house wins. This means that each bet has only a 48% chance of winning. And the more we play in a row, the less chance we have because at some point we might come home empty-handed.
However, if you invest according to the good method and invest, the odds increase. Especially long term. It’s also good to remember two rules of great investor Warren Buffett: First, don’t lose money. Second, never forget the first rule.
Information and probability are not the same
When you go to a casino or play the lottery, you place a random bet. In other words, you believe that luck is on your side, because if you’ve read our article on why mathematicians don’t play the lottery, you’ll realize that the odds are very slim. However, probability is not talked about in the stock market, at least not to the extent that gambling is involved. On the stock exchange, you become part of the real economic information from the company and can use it for your own benefit when buying or selling shares.
The short term to be a millionaire
When someone plays the lottery, they hope to become a millionaire overnight. In the stock market world, while there are brokers who make profits in the short term, the best results are almost always in the medium term. Therefore, it has nothing to do with how gambling works.
The luck of the winner
There is a phenomenon known as winner’s luck that is very common in the world of chance. When someone wins the lottery, he tends to think that luck is on his side and starts using that money to increase his winnings. Then, it is very likely that you will lose everything.