Investing and Gambling - Please Don't be Mis-Informed
Before I begin, as you are reading this week’s article, I would like you to keep these two definitions at the back of your head
Gambling: Making risky decisions in the hopes of achieving a desired result.
Investing: Utilize money or financial instruments to generate a profit by putting them into stocks, bonds and other investment vehicles.
Over the past few years, whenever I sit down to talk to people and discuss investing and the question comes around if they invest I am always baffled by the fact people believe that investing is gambling. Many people I’ve met dismiss investing as they perceive it is another form of gambling. History however, has shown that those that invest generate solid returns in the long term and have their money work for them while they generate additional income. Investing allows us to make those big purchases, make financial plans a reality and set aside money and let it grow for important milestones in life like purchasing a house, car or that trip to Thailand that we so dearly want.
The following reasons should help illustrate my point
#1 Looking at History:
History has shown that the average return of a portfolio invested in the S&P 500 will result in a 7-8% return annually. Does anyone know what the average return is at a casino? Stock traders and retail investors (us) have historical data to look at. Investing is not based on luck and just choosing a company in general. The wealth of information available is abundant. Just a quick search on any stock site will provide you with historical charts, financial statements, balance sheets and much more. Earnings, cash flow generations and financial ratios are all elements that many investors scrutinize before choosing where to place our capital. We do not just blindly crash the party hoping to strike the jackpot.
#2 Time Landscape
Another key element with investing is time. Unlike the casino where your money is only good for a hand or a spin — investing is generally a long term activity. Growth investors especially are interested in long term prospects and can be invested in a company for upwards of 20 years. Warren Buffett once said when asked what his holding period for a certain company was and he replied “Our holding period is forever”
Finally, when you invest in a company or index fund you become an owner. For stocks, you become an owner of the company which means you retain voting rights and receive dividends (if applicable). You are rewarded as a shareholder if the company performs well. On the other hand, in gambling, once the bet is placed its gone – you can’t retract it and if you lose the hand its gone. In investing, if you realized you have made a mistake at least you can get out (it may be a loss but its better then nothing). If you’re scared of losing money in the market remember you can use trading tools like different trades that will limit the amount of money you lose (more on this in the coming weeks). In addition, as a shareholder you benefit from stock splits, dividend increases and many other perks.
At the end of the day, various sources have shown and demonstrated that a solid investment fund can generate a solid return of 5-8% annually. For sure it will not always be rosy as some investments will be worst off then others. But at the end of the day, I would rather trust my money in a blue chip company, index fund or mutual fund then letting it find lady luck on the slots.
Disclaimer: All of the above information is my own personal opinion. The figures listed are historical figures and are approximate figures. Please do your due diligence before choosing investments.