Long-term vs. Short-term Focus
The first thing to understand here is that investing is a long-term phenomenon. You can't go to Las Vegas and think that you are going to hit it big at the blackjack table. The odds of that are low. But you can make a lot of money investing over a long period of time.
Investing requires discipline, patience, and a long-term strategic view. It's not something you do every night after work. In fact, very few investors are active daily participants in the markets. Active traders may be a better fit for investing in a casino.
Investing requires a long-term view, where you choose stocks that are based on their fundamental value and how they are likely to perform in a variety of situations. You then hold onto those stocks for years before making any profit.
Gambling requires only a short-term view. It's a "hit it big" or "hit it never" phenomenon. You want to get lucky at the blackjack table or the slot machine, and if you don't get lucky that evening, you can't try any other day. You can retrieve your money from the ATM and try again another time.
This doesn't work in investing. Once you buy a stock, you are committed to holding onto it for an extended period of time, regardless of the daily ups and downs that occur.
Buying Cash Flow or Price Appreciation
In gambling you are playing the house, in stocks you are playing the other players.
In buying a stock, the first order of business is to value the underlying company. The stock price is determined by the value of the company.
Is the stock undervalued or overvalued compared to its intrinsic value?
Does the company have significant earnings growth potential?
Is the company in a cyclical industry like airlines and shipping? Or is it a value play like a utility company?
Does the company make products that people will continue to buy regardless of the market? A consumer product like Coke or Pepsi vs. Amazon or Sears?
What is the dividend yield? Is it sustainable? What are the prospects for future dividends?
Are the fundamentals of the company improving, or are they deteriorating?
Is the stock trading near a 52 week low? A year high? In a bull or bear market?
Are you familiar with the company?
How liquid is the stock? Is the stock thinly traded?
As Warren Buffett says “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
Betting on the Trend, Not the Stock
You can’t have a conversation about gambling and investing without wading into a pool of heated philosophical arguments.
Sure, both activities have an element of risk – stocks versus sports and the like – but they are executing them in dissimilar ways.
When you gamble, you willfully buy into a crazy scheme. You are essentially betting against the house in hopes you can win the jackpot. For example, you buy into the idea that the Royals will win the next game and will bring you a windfall of cash if they do indeed win. Or you buy into the idea that your favorite football team will win the championship game, hoping you can make a bundle by the time the next game kicks off.
When investing, however, you are trying to persuade yourself that the stock you’re buying is “the next big thing.” You are delving into a company with the intention to sell it for a profit to someone else when it truly takes off.
So gambling is a short-term approach to a risky situation, whereas investing is a long-term approach to a venture.
Although both have the potential to make money, it’s how you play them that really tells a tale.
The Importance of Fundamentals
There are many similarities between gambling and gambling. Gambling costs money, but it is illegal in most places. Gambling can be done online, but it is just as much of a gamble if you are playing cards with a family member at home or if you are playing online with a stranger in a cyber café.
A major difference between gambling and investing in stocks is that investing takes money and time. There is no guarantee that you will make money when you start investing in stocks. In fact, you can expect to see a lot of red on your balance sheet if you invest in an unproven company that offers little-to-no shares to the public. But after you take into account the fundamentals of the business, employ the use of risk management, and consistently invest, it will be much easier to tell whether your investment in stocks will be worth it in the long run.
But if you want to see a return in your investment right away, stock trading can be achieved easily with enough money. Online trading is available to anyone who is old enough to be on-the-grid. Just make sure that you are knowledgeable about how the stock market works, and you must have the money required to throw down a buy or sell order.
Diversification as a Dividing Line
Gambling is all about playing for the chance of winning. You could get rich or go broke.
Gambling is like playing the highest-risk lottery ticket you can find. Except instead of, say, having easy access to a few stores that sell lottery tickets, you’ve got access to a worldwide stock of stocks.
Gambling is pure risk and zero skill. Buying stocks are completely the opposite. Buying stocks is the most skill intensive of all money activities.
So I guess it’s not hard to see why I think gambling is stupid.
Having said that, let’s expand on the risk and skill parts. What’s the risk difference between gambling and investing in the stock market?
To answer that, let’s go back to the lottery. Remember when I mentioned that the reason you buy lottery scratch tickets is because you’re a bad investor?
Well, that’s not true. You can’t be good at everything. But you can be a bad investor.