Understanding the Difference between Investing and Gambling


Let me ask you this. Do you think you are an investor? If your answer is ‘no’, it is wrong, because you are. How do I know this? Because you take risk every split second in your life, even when you are brushing your teeth in the morning, your gum may bleed, but you want your teeth to shine; when you put that piece of potato in your mouth, you can get choked, but you want to satisfy your hunger; even while you are sat there reading this article on the internet! You want to assimilate the information, but your eyes may hurt! Each of these activities takes an input or resource, which could be time, money, energy, you name it, that are used in isolation or in combination to achieve an output or result.

An investor is anyone who takes a definite amount of risk, as a result of forgoing a resource (money in the financial markets), in order to obtain a proportionately higher return. Note that when the risk taken is calculated it is known as INVESTMENT; when risk is taken without much thought of the consequence, it is known as GAMBLING. I’d say that that as regards day to day activities, you are normally an investor, because you are often fairly cocksure about the results you will get.

Thus when it comes to making an effort to obtain returns on our principal, we have a choice to gamble or to invest. It is sad to say that a lot of people who consider themselves investors in the financial markets, are realistically speaking, gamblers. If you are somebody already ‘directly’ involved with the financial markets, I have a feeling you are anxious to find out to which category you belong.

Do you practise diversification sufficiently in your investment? Is your strategy for choosing a security/share one based on a long-term study (say 10 years or more) of its performance? Do you follow investment fads? Are you quick to sell a security/share you already hold, only to grab a new security that is gaining acceptance in the news, on the back of its high returns? If you answer ‘no’ to the first two questions, and ‘yes’ to the rest, the hard truth is you are a gambler. You might not be very bothered about belonging to this grouping now, because you are perhaps young, and have got a lot of money to play around with. Have you really pondered over the kind of retirement you want to have? Have you made sufficient provision for yourself, your lovely children and spouse (if any), in the event of sickness, death and any unwelcome eventualities. Think deeply and earnestly about this.

When it comes to judging performance, the well-being of a security tomorrow cannot be ascertained from its performance today. This is an idea in support of the ‘random walk’ hypothesis in investment theory. A wise investment hence, will be one in a security/share that has a good past track record; an industry leader for example, with high and reliable returns. Aside of this choice, diversification in the light of industry, and security type (bonds, shares, unit trusts) is also very highly recommended, to increase the chances of guaranteeing the expected returns. There is a massive advantage to be enjoyed from an investment in a unit trust that invests in diverse securities with excellent track records in performance.