One of our long time readers submitted a great question..."How do you differentiate between gambling and investing?" I love this question for some many reasons...it really gets to the heart of investing and financial security.
Lady Luck is a Brutal Mistress
You see, my dad was a bit of a card shark. He was all about finding the perfect strategy to beat the house at blackjack. He'd buy systems, software, and even trained himself to count cards. He was convinced that with the right system he could beat the house...Now, I'm not saying this is the right way to go about things, but it does bring up an interesting comparison to investing.
See both gamblers and investors ride a roller coaster. Both will talk about "paper losses" and the whims of lady luck aka the "market." And on the surface, there are folks out there who make their living gambling. They've got their systems, their strategies, and they seem to consistently bring in winnings. Heck, the IRS even has a box on your tax return for gambling winnings. But does that make it a solid financial strategy? Well, not necessarily.The thing about gambling is that it inherently involves a certain amount of chance. And that's where the difference lies. Is your investment strategy based on chance, or is it based on statistics, probability, and a certain amount of financial savvy? Take a second a think about it. Often the first question I ask investors is, "what is your strategy?"When you're investing, you want to be sure that your strategy isn't based on the whims of the market. It should be based on facts, logic, statistics, and probability. Without a sound strategy that is designed to win in both the good and bad times...you might as well be gambling.
Investing Does Not Involve Chance
When it comes to investing, I don't see the stock market as a lottery ticket. It's not a game of chance where I might make money, or I might not. When I put my money into the stock market, I know I have a near certainty of making money. In fact, over the long run, it's pretty much guaranteed.But folks, that certainty doesn't come from luck.
It comes from understanding the stock market, understanding what drives its growth and value. It's easy to go in there and pull the lever, buying this stock or that stock without any rhyme or reason. But if you do that, you could end up buying losers every single time. You could lose all your money. You could go bankrupt.But if you're smart about it, if you play the odds in your favor, you can win over the long run. And that's the advantage you have in the stock market that you don't have in a casino. In a casino, the games are rigged against you, given enough time the house will always win. But in the stock market, you can be the house...in fact, everyone can be the house...because the stock market isn't a zero sum game. The stock market does not require winners and losers.
Isn't The Stock Market Over Priced?
Often times, I get the question, "But, Leibel, Isn't the stock market overpriced? Isn't it going to come crashing down?" And here's the answer I always give...and it's really one of personal time horizons.
Over the long run, as long as the United States is a growing concern, as long as we have a functioning economy and people are having babies, I know the stock market is going to continue to grow. It's a product of our society, of our world.When people have babies, those babies consume products and goods created by companies. Those companies raise money from those same people. Hence the price goes up, the value goes up, and the stock market grows. It's a beautiful cycle, and it drives the growth of the stock market. In fact, indirectly, this overall growth is the primary job of the Federal Reserve. Their number one job is to ensure that our economy grows at a sustainable rate...which is great.
Of course, if we zoom in and try to pick the next Uber, the next Tesla, the next Facebook, that's gambling. Statistically speaking, you're not likely to get that right. I