Have you hesitated to start investing because you assume it’s just gambling? If so, you aren’t alone. Many believe what goes down on Wall Street is the same as shoving your money into a slot machine. While both gambling and investing do have elements in common, they aren’t the same. Investing is not gambling.
January 2021 was WILD time for the stock market
GameStop and AMC: I know you heard about them.
With the “meme stock” frenzy, we saw perhaps for the first time ever, extreme group economics among retail investors. The Reddit traders that took lowly stocks like GameStop and AMC to crazy highs completely shook up Wall Street.
Just about every media outlet was reporting out on the frenzy, which led to just about everyone wanting a piece of the action.
Why? Because for a few days, it felt like easy money.
You know, you just buy this stock, and BOOM: you’ve doubled, tripled, or even quadrupled your money in a day or less.
But is that investing, or is that gambling? Is there even a difference?
Investing is not gambling; I have done both
When I first started buying individual stocks in 2014, I purchased shares of two companies. One was a New York-based Real Estate Investment Trust (REIT) company that focuses on the acquisition, and investment of family and commercial properties. The other company was a Texas-based offshore drilling company.
Before buying shares of the REIT, I looked into the company’s financials, strategy, and plans for the future. I had an interest in real estate but didn’t want to directly deal with properties.
Buying a REIT was a compromise that aligned with my long-term goals.
The offshore drilling company on the other hand? I couldn’t even really tell you what offshore drilling was, let alone anything about the company.
My decision to enter was purely because at 80 cents/share, it was cheap, and it seemed like an opportunity to double my money really quick.
I never even looked into the company’s financials, which was a mistake I paid for. Months after buying the stock, they went bankrupt and I lost my money.
Perhaps if I looked at their balance sheet, I would have noticed they were in a crap ton of debt, with no real strategy to pay it off.
With the REIT, I was investing. With the offshore drilling company, I was gambling.
Investing and gambling both involve risk
The main reason why investing and gambling are often thought to be the same is because they both involve risking your money in hopes for a future gain. This is a form of speculative risk: the chance of incurring a profit or a loss.
In the case of both stocks I bought, I was putting money on the line in hopes of a future profit.
However, my approach, research (or lack of), expectations, and timeline couldn’t have been more different.
Gambling is hoping for luck to intervene
When I bought shares of the offshore drilling company, I wanted to turn my $1,000 into $2,000 as soon as possible. I just wanted a short-term pop in share price so I could sell, take my cash, and go.
I wasn’t interested in riding out the fluctuations of the share price, and I didn’t even know the long-term vision of the company. In fact, I didn’t care.
My outlook was short-term, uninformed, wasn’t considering the bigger picture, and was dependent on random chance.
When you just want the quick and immediate gratification of “flipping” your cash, that’s gambling.
When your main strategy is luck, that’s gambling.
Luck, which has never been much of a sound strategy over time; something I found out a decade ago when my roulette gambling luck eventually ran out.
Investing considers a strategic view
When you invest, you are in it for the long-term. Well at least, longer than a few days or weeks.
Investing requires patience, and discipline to ride the fluctuations in the market without changing strategy.
When you invest, you are seeking consistent returns over a longer period of time, expect company growth, and align to the vision of the company.
Sure, you don’t have a crystal ball, so things could always fall apart in the future. That’s the case with any kind of speculative risk.
But, with investing your outlook isn’t based on luck or hope a company just does well today. You expect them to do well over time.
“Buy and hold” isn’t just a catchphrase
I first purchased shares of the real-estate REIT back in 2014. As of this writing (March 2021), I am still a shareholder.
Over this period, I have witnessed many ups, downs, dividend cuts, acquisitions, and leadership changes.
I am still a shareholder because well, I believe in the long-term vision of the company.
My decision to invest in them wasn’t a blind cash-grab attempt. It was an informed decision that continues to pay off.
But if you want to gamble with stocks, is that bad?
In a word-no.
Just like going to any casino isn’t bad, gambling with stocks like GameStop, AMC, or other “meme stocks” isn’t bad either. The key is just being aware that’s what you’re doing.
Awareness of the action ensures you can check yourself appropriately, and not let it get out of hand.
So, if you DO decide to get a little risky:
- Realistically manage your expectations. Going to Las Vegas to gamble and expecting to return home a millionaire wouldn’t be very realistic. Does it happen? Yes. Is it likely to happen to you? Nah. Same with gambling on stocks. Never go into a short-term play expecting to hit it big and quit your job. You could blindly lose it all like I did with the offshore drilling company. Please, don’t treat the stock market like the Mega Millions.
- Never use money you need. Last year, I bought shares of a biotech company that a friend told me about. I knew little about the company, but I just wanted to see what would happen. Yep, it was a gamble, but I gambled with money I could afford to lose. It was money that if I lost, I wouldn’t care. That particular gamble paid off for me, but that’s a story for a different post.
- Only gamble with a small percentage of your assets. When building a portfolio, every company shouldn’t be bought on a whim. If you are going to “play around”, keep it as a minimal part of your overall portfolio. Personally, I keep my “gamble” plays under 1% of my total invested assets. That means for every $100 I invest, only $1 goes to companies I don’t expect to hold. Everyone has a different risk tolerance though, so consider talking with a financial adviser to figure out yours.
Ultimately, long-term investing is the way to go
There’s a reason most market experts, analysts, and advisers recommend long-term investing: it works.
Long-term investing has been a proven approach to wealth-building over time. If you plan to take that step, keep this in mind:
- Do your research! I’m not saying you need to know every single detail of a company. But at least have a basic understanding of what the company does, how they make money, and their plans for growth. Use sites like Yahoo Finance, and Morningstar to up your knowledge. Simply type in the name of the company in the search bar and take a look at their company information, financials, outlook, and analyst opinions.
- Ensure you align with the vision of the company. Would you willingly invest years of your life dating someone you didn’t actually like? I would sure hope not. If you are going to invest time, money, and energy into ANYTHING, you should believe in it. Same with investing. When investing in a company, you should believe in them, their vision, and their direction. Otherwise, it’s not a good fit.
- Be patient. Investing is meant to be a long-term affair; can’t stress that enough. That takes having patience, discipline, and a long-term perspective. Billionaire Warren Buffett said it best with “Nobody buys a farm based on whether they think it’s going to rain next year. They buy it because they think it’s a good investment over 10 or 20 years”. Sure, we aren’t talking about farms, but that concept also applies to stocks. Buffett also said: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”. In other words, if you aren’t willing to be patient with a company, walk on by.
- Taking Risks with Money in Order to Start Building Wealth
- Debt, Save, or Invest – Where Should Your Money Go?
The next time you see another GameStop or AMC in the news and want to buy shares, ask yourself: Am I investing, or am I gambling?
While both investing and gambling involve taking speculative risk, they are not the same.
Of course, if you decide you want to gamble, there’s nothing wrong with that. You just need to be aware that’s what you’re doing.
Intentionality, mindfulness, and accountability are three important keys to wealth building, and that still applies whether you are investing or gambling.
Oh, and before I go, I am not your investment adviser and nothing in this post should be taken as specific investment advice. It’s just education!
For weekly education, tips, and insights on how to grow your wealth and achieve financial well-being, join the community of people like you. I often share thoughts on the stock market and want to help you learn the wide world of investing!