The first thing I often hear when people learn that I’m an investor is that’
“Isn’t that just glorified gambling?”
Fed up of constantly explaining why it isn’t, I decided a blog post was necessary.
The main reason why many think that investing is a form of gambling is because they don’t know the difference between trading and investing.
What’s trading and what’s investing?
Traders will buy stocks (or currency, or commodities) with the intention of selling them at a higher price.
These individuals aren’t interested in ‘value’. Conversely, they are obsessed with a range of complicated ‘charting’ methods and trends that they believe will identify stocks/currency/commodities that will increase in value*.
They then purchase the stock/currency/commodities and seek to sell them at a higher price*.
Investors (such as myself) have no interest on the stock’s immediate trajectory. It could drop in value, or rise in value.
Instant capital appreciation is not the aim of an investor.
I, like many other investors, seek to purchase physical stakes in companies that I intend to hold forever for a reasonable price.
When I purchase shares in McDonalds, I own a slice of McDonalds. Sure, this stake is small – but it’s real.
This is markedly different to ‘trading’ because Traders seek to hold their purchases for a limited time and have absolutely no intention of holding their stake for its underlying value.
If their purchase drops below a certain price (their stop-loss), they’ll sell their purchase and realise their loss.
conversely, investors doesn’t lose anything as they will always retain their stake in a company.
Sure that stake may increase or decrease in value. But it’s always there (bar bankruptcy of course!)
Simply put, traders ‘gamble’ on a purchase moving in a certain direction. If it moves in an opposite direction they lose money where investors purchase an asset.
The fact is: If one classifies investing as ‘gambling’ then, simply, any form of ownership would be gambling.
Is purchasing a house a gamble?
Your house could increase or decrease in value, but you still keep the house regardless, right?
The only problem would be if you purchased a house purely for capital appreciation but then sold it if it dropped in value! This is what traders do (crazy if you ask me).
The reason I invest is to constantly increase my wealth through owning physical stakes in the world’s most succesful companies.
In return, these companies reward me with a dividend income.
*Traders also identify stocks that will decrease in value in order to ‘short sell’ the stocks.