Gambling vs. Investing: Your View on the Market Matters

I have written previously of not being much of a gambler.  My first experience was at a young age pitching pennies against the stoop out in front a neighbor’s row home.  I was never happy about seeing my coins scooped up by a winner.  I started sticking loose change into a jar and focused on playing any sport I could.

Fast forward to high school and the weekly pro football pool sheet was quickly disseminated by Monday or Tuesday.  We did not have to contend with Sunday, Monday or Thursday night games delaying getting the odds out early in the week.  After a couple weeks of losing $2 a pop, my interest waned in lightening my pocket.  I learned I was not very good at picking winners consistently, so I opted for depositing any cash I had into a passbook savings account.

My last experience with gambling was at Lake Tahoe in California.  A friend convinced me to play craps.  He was an experienced gambler which means he would eventually lose back everything he won.  Following his lead, we built several stacks of chips. 

When I saw the winnings go over $1,000, I pestered him to quit.   Of course, we received great service from the wait staff who supplied numerous free drinks.  With dawn breaking, I pulled my friend from the table with winnings of nearly $700 each.  That’s the last time I laid a bet at a casino. The odds favor the casino.  Every. Time.

There are some investors who approach investing in the stock market the same way.  They identify individual stocks as the next big thing and make a big bet.  They invariably lose money.    Unfortunately, they “win” just enough to make them think they know what they are doing.  Once a trade goes bad, I’ve heard some complain about the “rigged” market.  I know of one individual who traded thousands of times a year blowing through a million-dollar account in just a few short years.  This is not investing, it’s gambling.

Individuals who trade like this are often blind to the fact that their ego is at fault.  It makes them think they know more than they do.  So, they make bad bets again and again, just like a compulsive gambler.   Talk to any regular gambler and they will always say they are even or slightly up.  Casinos must not make a profit.  Unsurprisingly, it’s often men who are willing to take on this risk again and again.

If you must trade stock this way, I recommend opening a separate trading account.  Put a small portion of money that you can afford to lose in the account and trade away.  In your investment account, you should be properly diversified across multiple assets classes.  You do not need an investment advisor to accomplish this, but unless you are accurately assessing your risk profile and your return needs you might want to consider one.  An advisor should also be providing on-going re-balancing of the portfolio.

Of course, there are professional traders who are capable of identifying stocks that may have significant upside.  These professionals do this for a living.  They are constantly researching companies and examining news and trends.  There are professionals who make very short-term bets on minor movements in a stock’s price in one session.  These day traders are looking for incremental price differences to secure a profit.   

Unless you can devote the time and effort that it takes to trade like a professional, I strongly you recommend not making it a hobby.  Too many things can go wrong, especially if you are making heavy bets on an individual stock.  Enron, anyone?

If you would like to learn how an independent, fee only advisor can help you, please contact me.  Feel free to share with others and make suggestions for future articles: