One of the biggest myths about investing in the stock market (and for me, the most annoying one), is that it’s just the same as gambling. Short pause while I shriek. Did I mention how annoying it was? Admittedly, the noble art of investing, can be akin to gambling if practiced without due diligence and dare I say it, hard graft. Forget get-rich-quick schemes!
Not sexy
Common phrases like ‘playing the stock market’ certainly don’t help the cause, nor does it help when seasoned investors tell their friends they’re about to purchase a stock simply because they have ‘a good feeling about it’. Truth is, they’ve probably spent days and weeks researching the company, and finally decided to buy the stock after patiently waiting for a favourable entry point based on a number of valuation metrics.
Granted, the latter doesn’t sound half as sexy as the former, nor will it give their ego the same boost. But the truth is, becoming a successful investor requires a great deal of research, analysis, and hard work. That might sound boring, but a more gung-ho and cavalier approach more often than not leads to financial ruin.
Fear & greed
Another reason why the unenlightened often compare investing to gambling is that both invoke similar emotions, namely fear and greed. I would certainly agree with that. We may pretend to be rational, logic-driven professionals, but we’re human beings after all, and what could be more emotion-inducing than the thought of making or losing money at the click of a mouse?
Let me give you an example to illustrate why investing (the way we Fools practice it) is so very different from gambling. Let’s say you were interested in buying a sandwich shop, and you’d whittled the candidates down to two healthy-looking businesses available at the exact same asking price in equally unfamiliar neighbourhoods on the other side of town.
Bertha’s Baps
If you chose ‘Shirley’s Sandwiches’ over ‘Bertha’s Baps’ simply because ‘Shirley’ was your grandmother’s name, without examining the profit & loss accounts, then I’d say you were gambling. If however you favoured Shirley’s business because it was consistently making higher profits, then I’d say you were making a rational decision.
But here’s the kicker. If you’d done your research properly and learned that the factory nearby whose workers had been contributing 90% to Shirley’s sales was closing down, then perhaps you’d be more inclined to further examine Bertha’s Baps. Doing the extra homework in this instance would have enabled you to make a better-informed decision when choosing which business (or company) to invest in.
Lottery ticket
Buying any business is risky, but that doesn’t necessarily mean it’s gambling. We take risks in our everyday lives, whether it’s choosing a job, a partner, or even buying the right house or car, but it’s not the same as gambling. Purchasing shares in a publicly-listed company isn’t the same as buying a lottery ticket or backing a Grand National winner, you’re simply buying a small slice of a large business, albeit with an element of risk.
Despite what others might have you believe, the stock exchange isn’t a casino, and investing (when done properly) isn’t the same as gambling. As the great investors of our times have proven, investing with patience and perseverance is the key to building long-term wealth.