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This question never fails to irk me.

Everytime.

Now, before I go on, let me recount to you a story I remember vividly to this day.

Many years back, I was discussing investment with a dear friend of mine.

 

 

His family just got burnt in the stock market because his dad speculated dangerously with wild abandon.

The result - a whopping MILLION dollar gone down the drain!

He passionately ranted to me that the stock market is like a casino. It is for gamblers. You’ll never win.

Dabble in stocks and I’ll end up like his dad, he advised me.

I knew he was still recovering from the trauma of his dad’s big loss, so I didn’t want to say more and listened quietly on.

It had a major impact on me then as it was the first time I actually knew of someone who lost such a humongous amount of money.

And this story brings me to the topic I’m gonna discuss today.

 

Is Investing Similar To Gambling?

 

There is still a widespread perceived notion that dabbling in stock is equivalent to gambling.

While I do admit under certain circumstances, investing can be like gambling, but to lump them together will do gross injustice to all the careful and rational investors out there.

Fancy calling Warren Buffett a clueless gambler?

Or Peter Lynch an ignorant punter?

No way!

 

The Truth About Gambling…

 

When you gamble, you are already at the wrong side of the odds, as the house edge is almost always against you.

As the saying goes, “Making a living from gambling is easy - if you are a casino.”

You often hear gamblers cursing their luck and vowing to come good one day with a million bucks in tow.

Well, yeah. Perhaps. But highly unlikely. Make that EXTREMELY unlikely.

Think about this for a moment.

If gambling can really bring you an embarrassment of riches, do you think all the betting houses will still stand today?

Hell NO!

In fact, they are making an obscene amount of money off gamblers who literally hand them cash on a platter.

The fact is, as a gambler, you may have the odd winnings here and there, but in the long run, you will always be in the net negative range.

To put it bluntly - you are in LOSING territory.

 

Want Cold Hard Statistics?  

According to British Columbia’s partnership for responsible gambling, in lottery such as Lotto Super 7 (The Canadian equivalent of the local Toto’s version), the odds of matching all seven numbers are 1 in 62,891,499!

With slot machines, the chances of winning the top prize at maximum coin play can range from 1 in 4,096 to 1 in 33,554,00.

That’s way way less than 1%!

Now compare this to the odds of getting strike by lightning - 1 in 240,000.

The verdict is out - you will have better luck with the thunder god than the casino table. Whether you like it or not.

Unless you are a super talented professional gambler with a razor sharp analytical mind of a statistics professor.

 

What About Investing Then?

 

In investing, the tables are turned.

Unlike gambling, you can control certain factors.

You can choose which stocks to buy.

You can choose when to buy.

And when to exit.

Get them about right, and you have a great chance of snagging a stock that will give you a decent return.

 

It’s All About A Game Of Probabilities

 

As previously mentioned, in investing or trading, you actually have power to choose which stock you want to buy as well as when you want to enter and exit a trade/investment.

If these actions are done properly and rationally, it can greatly increase your odds of winning.

Coupled with a sound risk management with a cut loss and take profit plan, the downside risk can be further mitigated and minimized. 

Speaking about getting your odds in your favour, what does it mean for you? Actually it’s a rather simple concept.

For example, if out of 10 times, you make 6 winning calls, in the long run, you will still be in net positive territory. That will happen only when you get your odds right, and you should be striving for it, everytime!

 

The Importance Risk Management & Having A System

 

Actually there is something more important than being right most of the time.

The truth is:

It is more about how much you win when you make a right move and how much you lose when you commit a mistake than about getting it right more often. Here is an example to illustrate what I mean.

Let say you make 4 winning calls instead of 6 this time round, but you manage to score big on all 4 winning calls and at the same time limiting the 6 losing calls to small ones, then you will still be on the right positive track in the long run.

And this is when risk management comes in,

How to get about doing this?

Simple.

Firstly, stick with your winners and let your profit run. Secondly, cut the losers and limit the losses! Many losing investors (gamblers?) do the exact opposite - sitting with losers and cutting the winners.

If we can get the probabilities right, going in with the odds in our favour, together with the right risk management, it really isn’t so risky right?

The same simply can’t be said of gambling when your destiny lies in the hand of the house. Your only ally is Lady Luck.

I rest my case.

On A Last Note…

Don’t worry too much about getting it right all the time. This is not possible. Heck, even Warren Buffett makes losing calls.

We just want to be right for at least 51% of the time.

Doable? Definitely.

How?

Play safe.

Be systematic.

And keep your emotions in check.

And of course, you can always turn to your friendly and trusty StocksForGrads.com for more tips and strategies that are coming your way.

Play It Smart,

Jag Foo

Chief Editor

 

This article is available as a PDF Download

“The Real Truth About Investing and Gambling” PDF Download

 

tag:Gambling George Soros Investing Basics Investment Stock Investing Stock Market Warren Buffett

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