The cornerstone of both investing and gambling is the anticipation of a return, the only thing is that it should be congruous with the risks undertaken.
It’s quite astounding to see many investors getting swayed by a wave of stock market volatility. Stock markets are similar to your ping-pong game, it’s quite obvious that the stocks will keep oscillating back and forth. But does the value or fundamentals of the companies change with a 2-5% to and fro stock market movements?
If we go by the literal meaning of investing, it means to put money, effort, time, etc. into something to make a profit or get an advantage. And such investments can be in education/knowledge, financial assets, real estate, commodities, etc. Just like investments are not restricted to the financial world, gambling is not confined to casinos or betting in sports such as cricket, horserace or football.
While advising many clients on their investments, we encountered many investors who are otherwise successful in their respective fields, but not a great stock market investor. On having a candid conversation with them, the correlation between an investor’s behaviour and the stock market fluctuations started getting unfolded. These investors were in smiles when the stocks were going up but could not help themselves from fretting over a minor downhill in the market price. If only they could think rationally and see it as an opportunity to built a stack of amazing stocks, they would be telling their triumph tales rather than investing woes.
Are you an investor or a gambler?
How can you distinguish between an investor and a gambler? An investor is like an IPL team owner who has made a solid investment by building a great team consisting of a proficient skipper, great bowlers, fielders and batsmen. A gambler is a one who bet on the outcome without understanding the risks involved. Similarly, based on hearsays or stock market rage, many investors keep on accumulating stocks without understanding the risks inherent or their business model. In investing parlance, just because they are equities, they term it as their stock market investments.
What demarcates ‘investors’ from ‘gamblers’?
1. Dalliance Vs. Marriage
For gamblers, buying and selling stocks is a frequent fashion, which is often reflected in their sky-high churning rates. On the other hand, investors are in the markets for a long-term stretch, who expect to create wealth from augmentation in the value of the underlying business. This makes investing a time-rewarding process, whereas gambling is often referred to as a time-bound event.
2. Guesswork Vs. Calculation
The hallmark of an investor is his ability to assess the risk versus rewards and take decisions accordingly. Gambler or a speculator takes a random risk such as throwing a dice, hence the odds of favourable returns in their favour is also very low.
3. Delusion Vs. Conviction
Investors have a vehement affair with the fundamentals. They are fixated with valuation ratios, P&L numbers and balance sheet data. Gamblers are content with 20-30% gains and are deaf to the company’s underlying value. Also, because a gamble lays his wager based on the hope or his own estimates, his confidence may tremble quickly. Whereas an investor will remain as calm as the sea during the turbulent times in the stock markets. In fact, he will capitalize on such opportunities to buy sound stocks.
4. Irrational Vs. Rational
If 15% surge in your stock electrifies you or a 5-10% nosedive in your stock is keeping you awake at night, you are a gambler. A long-term investor is detached with his emotions and swears by empirical data.
5. Incongruity Vs. Equilibrium
The decisions of a gambler trickle with the media hype, stock market fashion, etc. On the other hand, a true investor will carefully craft his portfolio across various sectors and asset classes. Well-balanced diversification is the biggest virtue of a long-term investor, and this risk management strategy will help him to curb the potential losses.
Speculation, gamblers or investors can co-exist in a financial world. It is not wrong to gamble, however, undesirable if you are looking for a long-term wealth creation. It’s essential to identify whether you are investing or outright gambling before you can canvas your investment strategy.