Showing posts with label Comparing Investing And Gambling. Show all posts
Showing posts with label Comparing Investing And Gambling. Show all posts

Tuesday 4 December 2018

Investing as opposed to Gambling

Some aspects of investing can be very similar to gambling.

  • Not knowing what you are doing.
  • Not understanding what you own.
  • Trading in and out of the market.
  • Following the advice of interested parties.
  • Being in a hurry to get rich.
  • Relying on luck rather than skill.


Investing and wealth building is different.

  • It is both an art and a science and can be emulated.

Tuesday 17 July 2012

Are You an Investor?






Are You An Investor? Successful investors tend to possess certain characteristics.  Do you have them? What do you do, if you don’t? The first step to successful investing is knowing your strengths and weaknesses in the investment game. That way, you can work on those shortcomings and make better investment decisions.  The MarketPsych website offers free tests you can take to measure your suitability as an investor as well as other aspects of your financial life.
To take any of the tests, you have to register with the site (it’s free). If you’re concerned about privacy, you can register anonymously.
The Investor Personality test helps you understand your personality traits as they apply to investing.  The report you receive gauges your suitability as an investor and offers suggestions for improving any behaviors that could undermine your investment success.   The test takes about 20 minutes and includes 60 questions about your personality followed by 15 questions about what you would do in different investment situations.
The personality questions cover a lot of ground.  Do you tend to think things through? Do you plan? How do feel about change? Are you usually relaxed or easily stressed? Do you like excitement and adventure? Do you enjoy abstract ideas or prefer practical information? Are you confident? Can you juggle several tasks at once? Can you make decisions or do you vacillate?  Do you take others’ feelings into account? Do you react quickly?
The investment questions are a bit tougher because they don’t offer answers for the gray areas we all live in.  For example, one question asks whether you would choose to spend more now and have less in retirement, or spend less now and have more in retirement.  My answer is neither of those alternatives.  Another question asks what you would do if you bought a stock and its price increased significantly over a short period — without any news or information about the company.  Yikes! I’m an engineer, so it’s almost impossible to make a decision without any information. Some of the questions include one possible answer: watch the company in order to determine a reasonable purchase or selling price, and then make a decision.
The report you receive rates your personality in several ways, such as how conscientious you are, how emotional you are, whether you are an extrovert or introvert, and your openness and agreeableness.  Ratings that appear in green (see screen capture, this page) indicate suitability as an investor, whereas yellow ratings are traits that could inhibit your investment success.
The bias section of the report rates your confidence, risk-taking, discipline, thinking, and herding instinct.  For example, the hypothetical results include a below-average score in loss aversion.  You can click the Click here link to learn how this trait might harm your investing.  For example, the Risk-Related Biases Web page discusses the common mistakes many investors make with their investments, such as holding onto a loser hoping for a comeback.  Then, it includes specific advice for high scorers and low scorers for each aspect of risk-taking, including loss aversion, emotional vulnerability, risk aversion, and cutting winners short.  In this case, the explanation warns that low scorers for loss aversion might take excessive risk.



My Investor Personality Test Results  :-)
 Print
Investor Personality Test

PERSONALITY FACTORS
Conscientiousness : High 
Emotionality : Below Average 
Extraversion : Below Average 
Openness : Above Average 
Agreeableness : Below Average
For Details Click here
BIAS REPORT
Confidence Biases
Overconfidence : Above Average
Over-Optimism : Below Average
For Details Click here
Risk-taking Biases
Risk Aversion : Above Average
Emotional Vulnerability : Below Average
Cutting winners short : Below Average
For Details Click here
Impulse-control
Self-discipline : Above Average
Immediate Gratification : Below Average
Excitement-seeking : Very Low
For Details Click here
Intellectualism
Intellectualism : High
For Details Click here
Herding
Trend-following : Below Average
For Details Click here

Saturday 16 June 2012

Why should I invest?

Why should I invest?


One of the most compelling reasons for you to invest is the prospect of not having to work your entire life! Bottom line, there are only two ways to make money: by working and/or by having your assets work for you. 

If you keep your money in your back pocket instead of investing it, your money doesn't work for you and you will never have more money than what you save. By investing your money, you are getting your money to generate more money by earning interest on what you put away or by buying and selling assets that increase in value. 

It really doesn't matter how you do it. Whether you invest in stocksbondsmutual fundsoptions and futures, precious metals, real estate, your own small business, or any combination thereof, the objective is the same: to make investments that will generate more cash for you in the future. As they say, "Money isn't everything, but happiness alone can't keep out the rain." 

Whether your goal is to send your kids to college or to retire on a yacht in the Mediterranean, investing is essential to getting you where you want to be. 

Read more: http://www.investopedia.com/ask/answers/153.asp?ad=feat_invest101#ixzz1xvOolCKE



How does a person gain from an investment?
There are two main ways in which a person gains from an investment. The first is by capital gains, the difference between the purchase price and the sale price of an investment. The second is investment income, the money paid to the holder of the investment by the issuer of the investment. Depending on the type of investment, the source or mix of the total gain will differ. And in some cases, these different sources are taxed at different rates, so it is important to be aware of each. 

All stocks can generate a capital gain as the price of a stock is constantly changing in the market. This allows you to potentially sell for a higher price than what you bought the stock for originally. Some stocks also generate income gain through the payment of dividends paid out by a company from its earnings. For example, say that you bought a stock for $10 and the company pays off an annual dividend of $.50, and after two years of holding the stock you sell it for $15. Your capital gain is 50% ($5/$10) and your income gain is 10% ($1/$10) for a total gain of 60% ($6/$10).

Read more: http://www.investopedia.com/ask/answers/06/investmentgains.asp?ad=feat_invest101#ixzz1xvSiTT3n

Saturday 5 May 2012

Why More Ignorant Money Is Lost To Less Smart Money



A.K.A Why there are more losers than winners in the market
Through the years, trading has always been a pipe dream for most who wanted to get filthy rich. With the advancements in technology over the last decade, this pipe dream has been brought closer to home than ever before. Today, it is a very accessible dream to anyone and everyone. All you need is a computer and an Internet connection.
And of course, you need the right kind of market.
This is where the hype starts. We have been over-exposed to all sorts of advertising and promotional rah-rah that makes us believe that it is actually possible to make that fortune a reality. We see ads with winners making really fantastic profits from a single trade and we hear of friends who make a living from trading and living the good life. We see the rich and famous on TV that have made fortunes in the market. We read about people making fortunes from the comfort of their homes.
We believe we can be one of them. Worse, we believe it is really that easy.
What we don’t see in most cases is the real ugly truth. We don’t get to see losers, we never see the many hundreds or thousands that get wiped out and we definitely never hear what happens to the few winners when the market turns.
We never get to see how difficult it is for those successful few to make that living. We don’t see how much studying, hard work and endless hours of practice it takes to achieve that “easy” life. We definitely don’t hear about how much losses were accrued before the wealth accumulation started.
When the market is rallying at full steam, you always get to see new gurus hyping up their courses, authors of all sorts publishing their version of making a fortune from the market and everyone rushing to brokerages to get an account open. Workshops of all kinds will be touting their software that makes profits without the trader having to put in much effort. Some gurus will adapt their classes to ride the trend of the market – if Options is the way to go, you’ll get Options teachers by the dozens … if Forex is the flavor of the trend, then that’s what you’ll get lots of.
The market in itself is hyped. When everything is running up the charts, it is so easy to make money from the market. Everyone seems to be getting in on the action when a bull run is in full steam. The hype worsens as these bull-run winners put more money into the market to help the rally climb even higher. Pretty much like what is happening in our property market today. The “Aunties” and “Uncles” at the coffee shop also seem to have the best tips and everyone in the neighborhood is an expert at stock picking.
Scandals also abound when the market is in full hype. Hedge funds and pillion-trading are two of the many ways these scandals begin. In some recent cases, the owner of the fund starts living lavishly on his clients’ monies even before the fund is profitable. This adds to the hype. We see fund managers driving fancy sports cars and living it up in penthouse condos and sprawling landed properties. Everyone wants that life and the market can give it to you.
So the average Joe, or in our case, Ah Seng, joins the hype bandwagon and puts his hard earned money into a few bets in the market. It makes money for sure. The bull-run continues. So Ah Seng buys more and grows his wealth. He tells his friend, Ah Huat, about it and he joins the bandwagon. Soon, the market is flooded with Ah Sengs and Ah Huats who know little about the danger they just got themselves into.
The fact is the market had already been running up like mad which is where all the hype came from. By the time the new gurus, workshops and books emerge, the rally is almost always halfway there. This is when the aunties and uncles get wind of the easy money and this brings on the Sengs and Huats. Next thing you know, the market is over-cooked. Yet it continues to rally, albeit on suspiciously lower volumes.
The lower volumes are an indication that the smart money is already sidelined and waiting for the inevitable. The smart money knows when to get out and stay out. They know because the ignorant money has started to flood the market.
“When the market is greedy, you should be fearful.” ~ Warren Buffet
Then the inevitable happens – the market stutters and falters … the easy money slows down … volatility begins to rule the market … the ignorant money slowly realize that they have left their asses hanging in the wind without protection. But they’ll continue to live in denial because of the hype.
The market slides south. But not in a hyped-up crash, mind you. The market is a sneaky place that gives you more rope than you need to hang yourself repeatedly. It takes a slow and steady slide with the occasional bull-trap to keep the ignorant money believing that the correction is a “normal” thing in this business. After a brief reprieve to bring hope to those living in denial, and possibly bring in more ignorant money, the market continues its sneaky slide south. This goes on for a while and before the ignorant money realizes it, more than half the investment is down the toilet.
By this time, some of the gurus quietly “disappear” from the press, some workshops cease to exist, software traders start complaining that the systems are not working as promised, fund managers appear in the news for the wrong reasons and my class starts filling out with dozens of traders looking for a fix and a more realistic way to survive the market.
The market gets down to an impossible low. Gone is the hype and all that came with it. In its wake, it leaves a massive trail of destroyed lives and emptied bank accounts. The market is now “a dangerous place” when it was once a dream maker. The market is a “casino” when it was once an ATM. When the hype is all gone along with the money, people get serious and stay away from the market.
This is when the smart money returns.
And this starts a new hype cycle that brings in the new ignorant money.
The question you should be asking is not; “When will the ignorant money start to suffer?” If you thought of asking that question, YOU are the ignorant money.
The only question you should be asking is; “How do I become the Smart Money?”
To get the answer to that question, we commit to the next big mistake – The Education.
Most people know that trading is a stressful and dangerous job. Most also know that it isn’t easy and takes a lot of work and learning. Of course, there are the few who believe that the market can be beaten with a system or with some high-tech software. Then there are those who cling on to the ignorant belief that the market is a place that can get them rich quick.
Let’s not waste time discussing the dreamers and ignoramuses. Rather, lets look at the fellow who knows what it takes and is ready to work for it. Let’s look at the fellow who sincerely wants to learn all there is to know about this business but is unable or unwilling to get a formal education for it. It has been argued that one is able to learn about trading by reading books and obtaining information through the Internet.
So if it is that simple, why do so many still fail? The answer is just as simple; Learning the wrong thing without realizing it.
Most of the books available, either at bookshops or at the library are about INVESTING and very few are actually about TRADING. So what happens is that most people don’t realize the real difference between investing and trading and will assume the two to be the same with slight variances. That could not be farther from the truth.
Investing is much easier to learn – like learning to drive a Honda Jazz. It doesn’t take much to learn it and it is easily understood and put into practice without much difficulty. The trick thereafter is not to crash.
Trading, on the other hand, is a very different skill and mind set. It is akin to driving a Formula 1 car. Unlike the Honda where the manual version has the clutch on the left foot, the F1 car’s clutch is a very different mechanism and is controlled by the right hand. Unlike the Honda which packs less than 80bhp, the F1 car stacks up an earth-shattering 900+bhp which, in untrained and inexperienced hands, could end up killing the driver.
There is so much more to trading than investing. The skills involved are very different, the psychology is worlds apart, the knowledge needed requires way more weeks and even months to acquire and the amount of research needed to be a good investor is nothing compared to the daily research and monitoring the trader is required to do to survive the market day in and day out. Where investing requires little or no practice, trading demands hours and hours of practice time to hone the skill. The financial management skills are also extremely different in that the investor protects his capital by how much he invests while the trader requires a different skill set to manage his finances – its called “cutting loss” – something easier said than done.
So without realizing it, most beginners will pick up an investment book or visit sites hosted by investors or have contributing members who are investors and assume that all that knowledge gained will stand him in good stead as a trader.
And when things don’t work out, it gets confusing. The common query that follows is always, “Why is it others can make it but I can’t?”
You can’t blame the poor fellow because there isn’t much literature on this subject and even some so-called gurus don’t know the difference. But all you have to do to know that this is true is to just look at Wall Street – how come the investors don’t have to be on the floor of the exchange everyday while the ones on the floor everyday are known as traders?
Knowledge … a little of it can kill you quickly while the wrong kind will slowly bleed you to death.
Finally we look at a controversial reason why most traders fail – The Attitude
It starts right at the start where most newcomers think that the market can be a get-rich-quick plan. This is akin to thinking that the market is like a casino. Consider this fact – the house ALWAYS wins. So if you treat the market like a casino, it will make you feel like most gamblers do. Gamblers always win a few but lose a lot.
Some trade like the market is a system to be beaten. Such traders ought to give themselves more credit. You’re insulting yourself if you have this attitude. To think that the market is a system is to include yourself in that system. Therefore, the system you are looking to beat includes you. Give yourself some respect and while you’re doing that, give the market the same respect – we’re not robots in the market and we’re definitely not part of a system. We’re humans that are driven by emotions. The market is an emotional place, not mathematical. You cannot have a system to beat an emotion because there is no math that can factor emotional irrationality.
Then we have those that don’t realize how unscrupulous the market is. Their ignorance is evident when they correctly assume the market is not that clear cut but will still buy into the hype. What is obvious is that the market is made up of all kinds of people especially those who will do anything to get an edge, even through illegal and criminal means. It is also full of experts who have spent years in Harvard and Princeton and then more years with established institutions such as Goldman Sachs, Morgan Stanley and the like. They have hugely experienced mentors to guide them to become the next generation of world class traders. These people have so much leverage and influence on market sentiment and to make their advantage more unfair, they collude with their competitive counterparts in order to corner the larger market for their own gains. With such power, how is a three-day workshop graduate expected to beat the odds? Yet more and more look past the obvious and end up throwing their hard earned money to the power-brokers.
These are also those who buy into the idea that the market can be analyzed fundamentally with valuations. Such valuations do help to reduce risk. But that is an investment-styled strategy and not suited for trading. Trading is way faster and seldom allows the security time to flex its fundamental muscles before the next gyration takes out the profits. Read the previous lesson to know the difference between the investor and the trader and you’ll have a clearer understanding of this.
Others rely purely on technical analysis. I can’t deny that I base a lot of my analysis on technicals. But that is not the end all. All it takes is one bit of macroeconomic news and all that technical analysis is out the window faster than you can say “Cut loss!” Technical Analysis is great as long as there is no news to upset the prevailing sentiment and as long as volumes don’t dip. But the market is never so generous. So in the end, Technical Analysis is only a “best guess” … and contrary to common belief, Technical Analysis is not the best guess of when to buy or sell – rather it is most reliable when used to guess the best potential against the least risk or the most risk against unfavorable potential.
Then there are those who believe that a good tip from a trader is the key to easy money without putting in any effort. For this, I have only one analogy; will you take a heap of hard-earned money out of your wallet and give it to someone you hardly know and expect to get it all back after a few weeks? And if that person was trustworthy, would you still do it? And do you really believe that it will come back with more than you gave him? If in life we don’t make such practices, then the same principles should be applied in the financial world and most of all, in the market. The desire to get-rich-quick-and-easy makes simple people do really silly things with their money. And it is always only after getting burned that you hear those famous last words,” … if only I knew …”. Yes, you’ve heard the horror stories time and again and so has everyone else. Yet people continue to write new chapters into this horror story ever so frequently … all in the name of greed, gluttony and sloth.
The financial markets are like an office block in a busy business district. The people who go to work there are serious professionals who take what they do very seriously. They are highly experienced, very influential and extremely powerful. It is also like a hospital where the surgeons, doctors and nurses are highly qualified and trained professionals. People put their life in their hands everyday.
Then one day, some over-zealous graduate with three days of workshop knowledge comes into this office block and expects to beat everyone out of their jobs. Or this hyped-up graduate with only three days of experience comes into the hospital and expects everyone to trust him with their lives.
Okay, maybe that is a bit of a stretch but the implications are no different. Every professional takes years to study his craft and then spends more years honing the skills with hours and hours of practice and hard work. They also have a mentor to constantly guide them till the day they are ready to go solo. There is no easy path to success and there will be failures along the way. The financial market is to be respected and feared. There is no other attitude except humility that will help a trader survive it.
It is said that more than 80% of the market is made up of those who lose and less than 20% are winners. The truth is that those statistics apply to any profession – how many top rated lawyers, engineers, surgeons, etc are there compared to the many also-rans?
The big money is always at the top where there are few who have it while the small money is at the bottom where most have to fight for it. And there are only two ways to be at the top – either you are already there or work hard to get there.

Tuesday 17 April 2012

Is Investing Gambling?


I recently returned from a vacation in Las Vegas, Nevada and while I was out there, I received an interesting e-mail from a lawyer in Texas who was hesitant to let his teenage son begin investing because he thought it was just a legalized way for his son to gamble away his college savings. Now, I've heard many reluctant people refer to investing as "another legalized form of gambling" and I usually shrug it off with a smile but the fact is that investing is NOT gambling.

Webster's dictionary defines gambling as "to engage in a game of chance for something of value". In that sense, I suppose you could say investing is gambling but there is a more to it than just a dictionary definition.Gambling, for the most part, is simply a game of chance where the odds are in the house's favor. You hear amazing stories of how people have won thousands of dollars on a single slot pull, but the fact remains that you aren't expected to win. You enter a casino and you hope to win big but the odds of it happening are slim to none. That's the reason why a city like Las Vegas can grow so large. After all, the town wasn't built on winners.

Investing, on the other hand, is something in which the investor has the odds in their favor. One invests with the expectation of increasing the value of their portfolio. The reason is because the stock market has historically returned an average of 13% each year. Granted, there are risks involved and you don't always earn a positive return but, with the proper research, you can tip the odds even more in your favor.There are some professional gamblers who are successful but I doubt that they were successful from the very start. They probably lost money when they first started out and then learned from their mistakes in order to become as successful as they are now. But with investing, you don't have to lose money in order to invest properly. You can educate yourself before you begin by learning how investing works and then invest for the long-term.  Investing for the short-term or daytrading can be considered gambling because it's virtually impossible to see the very near-term future of a stock, but if you educate yourself and then take a long-term perspective, there is an excellent chance that you will earn a great return on your investment.

Thursday 24 November 2011

What is Risk Management? You want to be the rich statistician and NOT the gambler.


What is Risk Management?

Risk Management
This section is one of the most important sections you will ever read about trading.
Why is it important? Well, we are in the business of making money, and in order to make money we have to learn how to manage risk (potential losses).
Ironically, this is one of the most overlooked areas in trading. Many traders are just anxious to get right into trading with no regard for their total account size.
They simply determine how much they can stomach to lose in a single trade and hit the "trade" button. There's a term for this type of investing....it's called...
GAMBLING!
Gambling
When you trade without money management rules, you are in fact gambling.
You are not looking at the long term return on your investment. Instead you are only looking for that "jackpot".
Money management rules will not only protect you but they can make you very profitable in the long run. If you don't believe us, and you think that "gambling" is the way to get rich, then consider this example:
People go to Las Vegas all the time to gamble their money in hopes of winning a big jackpot, and in fact, many people do win.
So how in the world are casinos still making money if many individuals are winning jackpots?
The answer is that while even though people win jackpots, in the long run, casinos are still profitable because they rake in more money from the people that don't win. That is where the term "the house always wins" comes from.
The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money--not the gamblers.
Even if Joe Schmoe wins $100,000 jackpot in a slot machine, the casinos know that there will be hundreds of other gamblers who WON'T win that jackpot and the money will go right back in their pockets.
This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control its losses. Essentially, this is how money management works. If you learn how to control your losses, you will have a chance at being profitable.
In the end, Forex trading is a numbers game, meaning you have to tilt every little factor in your favor as much as you can. In casinos, the house edge is sometimes only 5% above that of the player. But that 5% is the difference between being a winner and being a loser.
You want to be the rich statistician and NOT the gambler because, in the long run, you want to "always be the winner."
So how do you become this rich statistician instead of a loser?


Read more: 
http://www.babypips.com/school/what-is-risk-management.html#ixzz1ebTZDg9e