Myth 2: Investing Is Gambling.
What is the probability of winning in gambling?
Investing is Gambling? Gambling consists of tossing a coin and hoping for heads or tails; there is no data to analyze and you have no influence over the outcome. Gambling is a zero-sum game, which means that if you win, someone else will lose. Similarly, trading in futures and other financial derivatives, as well as buying binary options, is a zero-sum game, or gambling.
Why is the house always winning?
The odds of the casino winning your money are greater than the odds of you winning the casino’s money, regardless of which game you choose to play. Because all casino games are structured to give the house an advantage, the possibilities and magnitude of prospective winnings are reduced.
For example, a roulette wheel is numbered from one to 36, so you might think this puts the odds for winning a single number bet at 36 to one. However, roulette wheels also have a zero, and sometimes they have a double zero and even a triple zero. The actual odds of winning are thus 37 to one, 38 to one, or 39 to one, not 36 to one.
How to make a good investment decision?
1. Do NOT let social media and the internet narrate your investments
Many gamblers have a strong sense of superstition. They’re always on the lookout for cues to gamble one way or the other. Investors in the stock market are no different. They are constantly examining social media, the internet, and the news for clues as to where they should invest their money.
Investors who know what they’re doing ignore the noise and focus on the numbers. They are interested in the underlying economic fundamentals as well as the investment’s long-term potential. They’re more interested in time than timing.
2. Do NOT fall into FOMO!
You are a gambler, not an investor, if you have bought in companies like GME/AMC or any other meme stocks because you are afraid of missing out (FOMO). You’re gambling if your investing thesis is based only on the fact that everyone else is doing it.
The cornerstone of the definition of investing is that you have no realistic expectation of a return. Instead, you leave everything to chance since FOMO is a stronger force than using smart financial strategy to guide your selections.
3. Do NOT be short-sighted about short-term gains
You are a gambler if you have no long-term investing ambitions and are more concerned with short-term gains. Investors that invest for a short period of time are bettors. What are they wagering on? They’re wagering that they’ll be able to time the market better than anybody else and beat the market.
We’ve previously demonstrated that no one can continuously outperform the market. Even expert market timers (fund managers) struggle to consistently beat the market over time, despite having some good days.
If you are putting your money in a savings account, you are foregoing a significant opportunity cost that could have been avoided by investing. Indeed, investing entails some risk, since large movements in the market frequently frighten away new investors. However, history has proven that if you stay in the market long enough, it will be lucrative.
This myth is indeed not true! Investing only becomes gambling when you are investing in speculative stocks which have:
- Weak balance sheet
- Weak cash flows and
- Not profit making
As a result, some may argue that risk comes from not knowing what you’re doing, which is a common theme in gambling.
Disclaimer: The information provided by LearnToInvest serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.