Warren Buffett on Gambling

Making Millions The Easy Way (Documentary)

Gambling

Warren Buffett on Gambling

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.

http://www.teenanalyst.com/investing/gambling.html

Trading vs. Gambling - Reasons They Lose Money

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

What is 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!

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

Ignore shares and get poorer.

Diary of a private investor: ignore shares and get poorer
Our private investor is back - and he says that savers who are prepared to take some risk will prosper.

Despite the Gulf of Mexico oil spill last year, BP shares are doing well Photo: PA

By James Batholomew

10:51AM BST 06 Jun 2011

After the glorious year of 2010 - for the stock market anyway - this year has, so far, been a damp squib. First it was up, then it relapsed, then it rose once more before retreating again. As I write, it is within 2pc of where it started.

As Lady Bracknell said in The Importance of Being Earnest, "this shilly-shallying is absurd". Which is it to be? Will shares finally rise or fall?

On the bearish side, I'm told, by people who ought to know, that Greece is bust, whatever the politicians say. Another well-placed individual has the same opinion about Ireland.

If either is right, shares could fall heavily on the day the default is announced. Some people say "it is already in the price", but I doubt it.

On the other hand, shares still look good value. I own some in BP which, at 458p, stands at a mere 6.8 times forecast earnings for 2011.

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Its adventures in Russia do worry me a bit and, of course, the shadow of the disaster in the Gulf of Mexico still hangs over it. But rarely in its history have the shares been treated with such disdain.

Professional and lifelong investors are now generally back in the stock market. But many private individuals are still holding back.

Over the past few years, I've talked to quite a few people about their investments and found they can be divided into four sorts.

The first thinks shares are too risky. They remain almost entirely in cash. In some cases they have good reason. Some have a limited amount of money and a very specific thing - such as school fees - which they want to be sure they can pay.

Others argue that shares are unpredictable and they don't know anything about them. Better to keep the money safe in the bank. These people have their reasons. But over the long term, I've seen so many of this sort, who were once well off, become very gradually much less so. I knew the daughter of a Seventies multi-millionaire who inherited her fair share. She kept the money in a building society and is now, frankly, just getting by. It's frustrating. She could have stayed rich.

The second group consists of those who have made quite a bit of money but have not had much time or interest in managing it. They were then persuaded by persistent, charming salesmen to invest in certain funds. For these salesmen, nothing was too much trouble. They visited them in their homes. They brought wonderful, sophisticated brochures and "personalised" recommendations.

The untold story which the salesmen never quite got around to explaining in detail was the full extent of the commissions and expenses involved. The people in this group have generally had a pretty thin time of it over the past dozen years.

The FTSE 100 is still rather lower than it was in January 2000, and all those commissions have eaten a substantial hole in the dividend income.

The third sort are thrill-seekers. To be honest, I know only one person in this group. There was a time when he got very excited about shares and was dealing on an hourly basis, following recommendations from a broker. After initial success, he lost a bundle and decided to give it all up.

Long-term, persistent portfolio investors are the fourth group. They have built up experience and understanding. They tend to have done best.

But where does that leave the sort of person who has other things to do and does not want to spend time building up experience in shares?

My flippant answer would be "poorer". You make your choices and live with the consequences. Trying to be more helpful, let me suggest this: how about putting, say, 15pc of free cash in a selection of lowest-possible-cost tracker funds? And then increasing the amount each year up to a level with which you are comfortable?

This way, you will not give away a fortune in commission. You will keep most of the dividends. You will not have to worry about selecting individual shares. And you are likely - though not guaranteed - to be richer in 10 years than otherwise. You could go for a mixture of, say, half of the invested amount in a FTSE 250 shares fund, a fifth in a Far East fund, another fifth in a US fund and a 10th in an emerging markets fund.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/8558975/Diary-of-a-private-investor-ignore-shares-and-get-poorer.html

Warren Buffet's strategy on technical analysis

Warren Buffet's strategy on technical analysis
Apr 05 '00

After much research and experience in investing I've discovered a simple strategy which works very well for profitable investing. It's a composite of Charles Schwab's and Warren Buffet's strategy. As you may know, Warren Buffet started with a little investment decades ago and now he's the third richest man in the world with over $30,000,000,000 in stock in the company he built. Charles Schwab is the genius who began the most successful off-price brokerage in the world. Here's what they say about investing and technical analysis:

Rule number one: Buy a company you'd be willing to hold for a lifetime.

When you put your money in a stock, you become an owner of that firm. You're essentially buying part of it and you reap the profit from the shares you buy in terms of earnings per share. Then the company may pay out those earnings per share in dividends or invest back into the company for growth. Make sure that you're buying a firm that you can depend on, even when the market is down. Investing isn't about the quick in-and-out schemes that lose most day-traders money. That's called gambling. Investing is putting your trust and your resources into a firm which you're willing to commit your hard-earned money to. This leads to my next point.

Rule number two: Ignore technical analysis.

Technical analysis is used to predict whether or not a stock will go up or down in the short term. Some people think that they can ignore the fundamentals of the companies they buy based on technical analysis and end up losing large amounts of money. Yet, no responsible financial advisor would recommend or practice buying based solely or largely on technical analysis. That practice is used for what I defined to be gambling. Essentially relying on technical analysis involves looking at the volume of trading, advances/declines in the share price, and trying to determine whether or not the price will continue upward or reverse. For example, a lot of people buy or sell based on momentum. They jump on the bandwagon or abandon ship with the rest of the crowd. Yet, these fluctuations based on the herd mentality do less for those playing on technical analysis and more for the investor who looks for good value in shares. For, often people selling on technical analysis overshoot and cause a stock's value to be worth less than its fair value. Thanks to people who get burned on these losses, investors find unique opportunities to snatch up great comanies at bargain-basement prices.

Rule number three: Focus on the Fundamentals.

You cannot accurately predict the short term price fluctuations of stocks. Let me repeat myself: You CANNOT accurately predict the short term price fluctuations of stocks. If you could, those stock experts working at Merrill Lynch and Goldman Sachs wouldn't be working. Believe me: they've got a lot more experience than you or I do, and they're not gambling. So, instead of "investing on luck" or momentum, take control and do your research. Find out whether the company is consistantly outpacing the industry. See what the price to earnings ratio is and whether it's being undervalued. Find out whether earnings per share has been increasing or decreasing. See what the financial community thinks by examining analyst opinions covering the firm. All this information is easily accessable over the internet and free of charge. IF you do your homework your gains will be all but certain OVER TIME and you'll feel satisfied and proud with your investment choices. You may even become attached to your company and become well acquainted with it.

Rule number four: Buy long term

Besides your liklihood of making money going up, there are tax advantages to holding stocks long term. For one thing, if you simply hold onto your stock, you won't be taxed until you pull out and your investment can continue to compound, without erosion, until you sell. But, if you constantly buy and sell, then you're taxed on all your gains and you don't get to pay the lower capital gains tax. Instead, it's taxed as regular income, which is a higher tax rate. For most daytraders, tax erosion is one of the biggest problems with making any profit. But, if you do sell make sure it's because your company has been consistently underperforming. This leads to the next point:

Rule number five: Buy low sell high.

Lots of people buy stocks and when the price dips they get scared and sell. Other people see the price of their stock go up and buy more. But, this seems like reverse logic, right? If you own a good company, short-cited investors can drive down a stock price temporarily because of one below-expected earnings report or a bit of bad news. Let these be times for you to take advantage of other people's hysteria and buy at an attractive price.


Be smart in your investment decisions. Warren Buffet didn't find himself where he is today by buying on momentum or following technical analysis. Instead, it took research, patience, and commitment. If you can commit yourself to these same principles, you too will enjoy financial success.

http://www.epinions.com/finc-review-1935-D65AB19-38EAE41E-prod2

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Summary:

Here are the main points summarizing Warren Buffett's stance on technical analysis and his investment strategy:

1. Reject Technical Analysis: Buffett's strategy fundamentally rejects technical analysis (predicting short-term price movements based on charts, volume, and momentum). The article equates this with gambling, driven by herd mentality and often leading to losses.

2. Focus on Business Fundamentals: The core of the strategy is to analyze a company's intrinsic value by examining its fundamentals: consistent performance, price-to-earnings ratio (P/E), earnings per share (EPS) growth, and industry standing.

3. Invest as a Business Owner: Rule #1 is to buy stocks as if you are becoming a permanent owner of the business. Invest only in companies you understand, trust, and would be willing to hold indefinitely, regardless of market fluctuations.

4. Long-Term Horizon: Investing is a long-term commitment, not short-term trading. This allows investments to compound and provides tax advantages (lower capital gains taxes) compared to frequent trading.

5. Be Contrarian (Buy Low, Sell High): The strategy advises being greedy when others are fearful. Use temporary market pessimism or bad news (which often deprices good companies below their fair value) as an opportunity to buy at a discount. Sell only if the company's fundamentals deteriorate consistently.

In essence, the article advocates for a fundamental, long-term, value-investing approach—buying wonderful businesses at fair prices and holding them—while explicitly avoiding technical analysis and short-term market speculation.

How to Never Lose Money in the Stock Market

Now that’s a pretty controversial heading, isn’t it?  It reminds you of Will Rogers’ line:  “I’m more interested in the return of my money than the return on my money.”

Losing money seems to be as big of a part of stock market investing as wealth building.  Losses and their devastating results certainly draw more attention.  In fact, the U.S. Securities and Exchange Commission, as well as other stock market watchdog agencies, require a warning to investors that losses are possible.

So how can I get away with that heading?  Simple:  Because it’s true!  A man named Benjamin Graham first wrote about the system in the ‘50s.  Warren Buffett and his Berkshire Hathaway company followed these rules and became the most successful stock market investor of all times.  These are their rules, and their system.  And here it’s presented in easy-to-follow terminology.

You must have a hook, and the acronym I use for this system is this: D.A.B.L.  (Don’t dabble in the markets, DABL instead). Each letter of the acronym stands for a part of investing; a rule if you will.  Follow these four rules and you will never lose money in the market.  Break even once, and you’re gambling.  There’s an old time Brooklyn comedian, named Myron Cohen, who said this about gambling:

“Here’s how you come out ahead in Las Vegas:  When you get off the plane, walk into the propeller!” So don’t walk into the propeller, follow the D.A.B.L. and build your wealth as sure as sunrise.

“D” Stands for Diversification.  To be properly diversified you need thousands of stocks encompassing all descriptions.  Large Caps, Mid-Caps, Small Caps, International, Growth, Value, Growth and Income, etc.  When you have a widely diversified portfolio, individual stock losses are swallowed by individual gains.  The “Enrons” will be offset by the “Microsofts” and “Exxons.”  In our practice, we use 54 mutual funds to achieve this.  Each fund owns hundreds and thousands of stocks.  Diversification upon diversification.  Now you might ask, “But what if I’d bought Microsoft and Exxon 20 years ago? Wouldn’t I have made much more?”  Yes you would have.  But what if you’d bought Enron?  Before it crashed and burned, Wall Street analysts wouldn’t shut up about what a great buy Enron was. You’d have lost everything, and it wouldn’t have recovered the same as the rest of the market when times got better.   In short, diversification removes the gambling aspect of stock market investing.

“A” Stands for Asset Allocation.  This goes hand in hand with diversification.  This is simply allocating investments in varied sectors of the economy to minimize market downturns and profit on the inevitable upswings.  Here’s a conservative asset allocation for all seasons:

Small Cap Growth funds               5%

Mid Cap Growth funds                 5%

Large Cap Growth funds               5%

Small Cap Value funds                 10%

Mid Cap Value funds                   10%

Large Cap Value funds                 10%

Value Blend funds                        10%

Aggressive Growth funds             10%

High Yield Bonds fund                   5%

Investment Grade Bonds                5%

International Global Bonds             5%

Global Emerging Markets               5%

International Growth                       5%

International Value                        10%

The word “cap” refers to Capitalization – the size of the stocks the fund purchases.  “Blend” means the fund invests across all styles and sizes in its area.  International usually means outside the U.S., while global includes U.S. investments.  This allocation uses strictly mutual funds.  Software like Morningstar places each fund in the “style boxes” described in this allocation.  If you don’t have enough assets to buy all those funds, start with “value” and “growth,” and leave “aggressive” and “emerging” markets for last.  If you’re investing in your 401(k) and don’t have all those options, do the best you can to duplicate this allocation with emphasis on “value.”

“B” Stands for Buy and Hold.  Buy and hold works, as proven repeatedly by the likes of Benjamin Graham and Warren Buffett.  Buying and selling securities results in losses or minimum gains for most investors.  It does generate lots of commissions, which is why the brokerage industry hates that one fact.  However they’re coming around with fee-wrapped account, tacitly encouraging buy-and-hold.

“L” Stands for Long Term Goals.  The minimum holding period is five to seven years.  Diversified buy-and-hold investments have achieved this goal in every seven-year period since 1969.  Stock market investments should always be held for the long term.  Anything else is gambling.

Now here’s a question that always comes up:  “I will be retiring next year.  Shouldn’t I be invested mostly in safe investments like treasury bonds and CDs?”

Well that depends on how much money you have for retirement.  The D.A.B.L. system is strictly to make money grow – make the pie bigger.  Most retirees have enough funds to leave a certain amount alone for seven years.  That’s the amount that should be invested for growth.  It’s going to vary for everyone.  There’s no pat answer – you’ve got to analyze your own situation.  Remember, this system is for growth, and every retirement portfolio needs growth – a certain amount of money targeted to get much larger in a given number of years to offset the ravages of inflation.

So go ahead, D.A.B.L – just don’t dabble.

By Patrick Astre

http://www.myarticlearchive.com/articles/8/224.htm

Message:  If you do not diversify, do not asset allocate, do not buy and hold, and do not keep your stocks for 5 to 7 years ... you are NOT investing but gambling. 

Warren Buffett on Gambling

Warren Buffett, CEO of Berkshire Hathaway, Inc., and one of America's most respected financial experts, talks about gambling in a fireside chat with Tom Grey. Buffett describes the impact of casinos and slot machines on people's lives and the economy; as well as the cynical nature of government sponsored gambling.

It’s also important to see some sort of upward trend in revenues and earnings growth.

It’s also important to see some sort of upward trend in revenues and earnings growth.

Value Line Investment Survey is found in most libraries and does a nice job showing long-term company trends. No one likes a company that constantly does worse than the year before, no matter what the value is! Every company needs some sort of “curb appeal” for you to profit from your investment. At some point, you need to sell in order to make money from your investment.

Upward trends help on the resale side of your investment.

Many investors find it hard to distinguish between “cheap” stocks and value stocks. Most times, stocks are low because they deserve to be low. There is nothing wrong with buying a “cheap” stock as long as you know and understand the risks. There are many stocks out there that have large annual losses, high debt levels and no equity. That does not necessarily mean you can’t make money on them, but you should call it gambling rather than investing.


http://myinvestingnotes.blogspot.com/2010/07/characteristics-of-value-stocks_23.html

Four ways investors go wrong

If you are one of those people who suffered heavy losses over the past decade, it was most likely due to one of the following four reasons:

1. Bad market timing. I fear that too often investors attempt to time the markets, which is extremely difficult even for professional money managers.

As I have pointed out many times over the years, it is one thing to identify trends but quite another to pinpoint when they will result in major market turns. Sometimes, the time lag can be many months or even years. Being on the wrong side of the market during that period can prove to be very costly.

2. Aggressive asset allocation. Although it has been repeatedly proven to be the most important single factor in investment performance, many investors fail to use the principles of asset allocation in constructing their portfolios. This frequently results in a higher level of risk than is appropriate [because investors tend to] overweight stocks and/or equity mutual funds and underweight fixed-income securities.

I have seen many cases where people in their sixties and seventies had equity weightings of more than 75% and then were stunned when they lost a lot of money in the market bust of 2008 and 2009. For most people, a disciplined asset-allocation approach is the first step to successful investing.

3. Flawed advice. I just read another study purporting to show that Canadians who use financial advisors are better off than those who don't. This one came from the Investment Funds Institute of Canada (IFIC), most of whose products are sold by advisors.

[According to the report,] households with an advisor had 68 per cent of their money in "market-sensitive" securities (equities and mutual funds) and 32% in "conservative" vehicles (term deposits, savings accounts, bonds).

Those who did not use an advisor were split almost equally—51 per cent market-sensitive to 49 per cent conservative. I suspect that a similar U.S. study would produce comparable results.

Financial advisors, like all other professionals, aren't perfect. Sometimes the guidance they offer simply isn’t appropriate, either because it is inconsistent with a person's objectives and risk tolerance or because it is motivated at least in part by commissions. So, it is always a good idea to ask questions and be sure you understand exactly what you're buying before taking the plunge.

4. Pure speculation. Some people like to gamble, pure and simple. I have always said that the place for that is a casino, not the stock market, but there are investors who can't resist. Occasionally, they make a big score. More often, they lose their stake.

Successful long-term investing requires patience and discipline. That may not seem exciting, but it will pay off over time and you won't end up sending me e-mails bemoaning your losses.

Gordon Pape is editor of the Canada Report.

http://www.theglobeandmail.com/globe-investor/investment-ideas/four-ways-investors-go-wrong/article1730868/

Boy's RM8mil gambling losses!!!!

Tuesday May 25, 2010

Boy's RM8mil gambling losses
By EDWARD R. HENRY
edward@thestar.com.my


PORT KLANG: A boy who went into high-stakes gambling at the age of 16 accumulated losses amounting to about RM8mil by the time he was 19.

The boy, a millionaire’s son, had allegedly followed in his father’s footsteps by gambling and ended up losing millions in foreign football bets over the Internet.


His compulsion for betting was so great that he came to be known as the Little Dragon.

Yesterday, Klang Barisan Nasional chairman Datuk Teh Kim Poo (pic) who was unable to coax the teenager to come forward to relate his gambling spree, said the youth’s gambling habit stemmed from his father, a compulsive gambler.

“This teenager grew up watching his father gamble and at the age of 16, he began to gamble after gambling agents gave him a credit line of RM100,000. Each time he was buried in debt, his father would bail him out. Over these three years, there have been several bail-outs,” he said.

Teh added when the accumulated losses came to RM8mil, it was the last straw for the father. The man, in his 50s, barred him from gambling and stopped his son from attending college. He now works with his father.

According to Teh, the teenager who was pursuing an Australian degree programme at a college in Petaling Jaya had on several occasions used college fees to settle his debts and extend his credit line.

He would lie to his father that college fees needed to be paid and use the money to pay the gambling agents.

On occasions when he could not settle the debt, the agents would send Ah Long to collect from the father.

Teh said gambling agents were the culprits who went after teenagers from rich families.

“Most times, these agents would go to ‘high-end colleges’ and look for these rich kids. ”

Teh added that Pandamaran New Village had become a hot place for such gambling and simple wooden houses were equipped with Internet facilities for the activity.

On Sunday, Klang and Kapar MCA held an “Anti-Gambling at Internet Cafes” signature campaign at the Taman Eng Ann morning market.

It got more than 2,000 signatures from parents in two hours.

Klang OCPD Asst Comm Moha-mad Mat Yusop urged the public to provide information on gambling dens that existed in Internet cafes so swift action can be taken.


http://thestar.com.my/news/story.asp?file=/2010/5/25/nation/6332739&sec=nation

Failure of a 'foolproof' gambling system

Calculating the true odds is quite complicated, but once every 28 or so times you begin the betting sequence on a 37-number wheel, you should expect to lose your entire capital base. I've dubbed this ''the Fairstar principle'':


Risk & reward

Consistent small wins can disguise the true relationship between risk and reward. 

A lack of appreciation of this principle has cost investors billions over the past three years. Funds run by the likes of Basis Capital, as well as the implosion of RAMS Home Loans can be linked back to the Fairstar principle.

Why? Because the business models were based on strategies that involved regular small wins (and, in the case of the funds, accompanying performance fees) until, one day, the unlikely event (or ''black swan'') turns up and calls ''time'' on the party.


http://www.smh.com.au/business/failure-of-a-foolproof-gambling-system-20100428-trch.html



Here is a good comment:

Any roulette system which starts with observing the behaviour of the wheel and when some particular pattern is observed, such as the "three consecutive same colours" commences operation, supposes that the wheel (or the ball) has a memory, which it does not.

Each spin is an event in itself, and what happened before is of no matter.

There could have been 100 consecutive reds and on the next spin red and black still have an exactly equal chance of occurring, assuming that the wheel is not rigged in some way.

"Common sense" might suggest otherwise, and that after 100 reds black MUST be overdue but common sense isn't common at all!

Doubling up to chase losses is a very risky business, if Bill Gates and Warren Buffett tossed a coin for a dollar a time and went "double or quits" after each loss one would eventually bankrupt the other.

And it would only take something in the order of 36 consecutive "double ups" for it to happen.

In fact, this is why casinos have table limits. Many people think they exist to protect the punter, but in fact they are to protect the casino from a punter with sufficient resources and nerves from continually doubling up until he wins.

If more punters studied elementary probability they would lose a lot less.

Reformed Gambler | Canberra - April 28, 2010, 2:01PM

To quote Albert Einstein, who knew a thing or two about maths: "The only way to win in Roulette is to steal from the croupier when he is not looking."

Reformed Gambler | Canberra - April 28, 2010, 5:58PM

Read also:
Behavioral Finance: Key Concepts - Gambler's Fallacy

"Sure lose (gambling)" situations in investment

There is only one real difference between investment and gambling.  In investment, one can expect to make a profit over the long run but gambling will always result in a loss over the long run although the gambler may not know it.

There are certain situations in the world of investment which resemble gambling and investors are well advised to keep clear of them.

1.  To buy shares when the market is at its "hottest" is definitely gambling because like all bull markets, once everyone interested has been sucked in, there are no more lambs left and the market can only go down.

2.  To sell shares which have been held through a long period of decline is also a gamble because the market is cyclical; it will recover after a long period of decline. 

These are among the many examples of the "sure lose" situations in investment similar to gambling.

Probability of Return in Investment, Speculation and Gambling

The main difference between investment, speculation and gambling is the "ex ante probability of obtaining a reasonable return which is known at the time when each of these three activities is carried out".

Ex-Ante Probability of Return

Investment -  Good
Speculation - Uncertain
Gambling - Negative

What this means is that we are fairly confident that we can make a reasonable amount of money by making a true investment; we are uncertain as to whether we can make money from speculation but we are sure that we will lose money by gambling. 

The sidetracking of investors into speculation and even gambling is the worst enemy of good investment.

We must be ultraconservative and maximise the odds in our favour.  If a stock analyst warns you that there is only a 10 percent chance that prices would rise above this level, you should avoid buying shares at that level.  On the other hand, if he says that there is a 90 percent chance that share prices would not fall further, we should certainly grasp the opportunity and buy. 

Comparing Investing And Gambling

Going All-In: Comparing Investing And Gambling

 

by Stephan Abraham (Contact Author | Biography)

 

How many times during a discussion with friends about investing have you heard someone utter: "Investing in the stock market is just like gambling at a casino"? Is this adage really true? Let's examine these two activities more closely and see if we can point out some of the key differences and also some surprising similarities.

 

Investing and gambling both involve risk and choice. Interestingly, both the gambler and the investor must decide how much they want to risk. Some traders typically risk 2-5% of their capital base on any particular trade. Longer-term investors constantly hear the virtues of diversification across different asset classes. This, in essence, is a risk management strategy, and spreading your dollars across different investments will likely help minimize potential losses.

 

Gamblers must also carefully weigh the amount of capital they want to put "in play." Pot odds are a way of assessing your risk capital versus your risk reward: the amount of money to call a bet compared to what is already in the pot. If the odds are favorable, the player is more likely to "call" the bet. Most professional gamblers are quite proficient at risk management. In both gambling and investing, a key principle is to minimize risk while maximizing profits. (To learn more, see Measuring And Managing Investment Risk.)

 

Throwing It in the Pot
Sports betting is probably one of the most common "gambling" activities in which the average person engages. From the weekly football office pool to the Final Four, sport betting is an American tradition. Only by thinking about your betting habits will you realize that you have no way to limit your losses. If you pony up $10 a week for the NFL office pool and you don't win, you lose all of your capital. When betting on sports (or really any other pure gambling activity), there are no loss-mitigation strategies.

 

This is a key difference between investing and gambling. Stock investors and traders have a variety of options to prevent total loss of risked capital. Setting stop losses on your stock investment is a simple way to avoid undue risk. If your stock drops 10% below its purchase price, you have the opportunity to sell that stock to someone else and still retain 90% of your risk capital. However, if you bet $100 that the Jacksonville Jaguars will win the Super Bowl this year, you cannot get part of your money back if they just make it to the Super Bowl. Betting on sports is truly a speculative activity which prevents individuals from minimizing losses.

 

Another key difference between the two activities has to do with the concept of time. Gambling is a time-bound event while an investment in a company can last several years. With gambling, once the game or hand is over, your opportunity to profit from your wager has come and gone. You either have won or lost your capital. Stock investing, on the other hand, can be time-rewarding. Investors who purchase shares in companies that pay dividends are actually rewarded for their risked dollars. Companies pay you money regardless of what happens to your risk capital, as long as you hold on to their stock. Savvy investors realize that returns from dividends are a key component to making money in stocks over the long term. (For more, see Dividend Facts You May Not Know.)

 

Playing the Odds
Both stock investors and gamblers look for an edge in order to help enhance their performance. Good gamblers and great stock investors study behavior in some form or another. Gamblers playing poker typically look for cues from the other players at the table, and great poker players can remember what their opponents wagered 20 hands back. They also study the mannerisms and betting patterns of their opponents with the hope of gaining useful information. This information may be just enough to help predict future behavior. Similarly, some stock traders study trading patterns by interpreting stock charts. Stock market technicians try to leverage the charts to glean where the stock is going in the future. This area of study dedicated to analyzing charts is commonly referred to as technical analysis. (To learn more, see our Technical Analysis Tutorial.)

 

Another difference between investing and gambling is the availability of information. Information is a valuable commodity in the world of poker as well as stock investing. Stock and company information is readily available for public use. Company earnings, financial ratios and management teams can be studied before committing capital. Stock traders who make hundreds of transactions a day can use the day's activities to help with future decisions. Nonetheless, stock information is far from perfect, otherwise, there would not be insider trading or the Securities and Exchange Commission (SEC).

 

If you sit down at a Blackjack table in Las Vegas, you have no information about what happened an hour, a day or a week ago at that particular table. You may hear that the table is either hot or cold, but that information is not quantifiable.

 

Conclusion
The next time you hear someone say that stock investing is the same as playing in a casino, remind them that in fact there are some similarities and some major differences.

1. Both activities involve risk of capital with hopes of future profit.
2. Gambling is typically a short-lived activity, while stock investing can last a lifetime.
3. Some companies actually pay you money in the form of dividends to go along with an ownership stake.
4. In general, most average investors will do better investing in stocks over a lifetime than trying to win the World Series of Poker.

(To learn more, check out our Investopedia Special Feature: Investing 101.)
by Stephan Abraham, (Contact Author | Biography)

 

Stephan Abraham graduated from University of Florida with a degree in economics. He has traded part time for about eight years with an emphasis on technicals. In his spare time, Abraham enjoys golfing, outdoor sports, photography and reading.

 

 

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Price is what you pay, value is what you get.

If stocks are bought without reference to value, they will in turn be sold without reference to value.

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When prices increase at a greater rate than can be justified by business performance, they must eventually stagnate until the value catches up or they must retreat in the directions of the value.

Only when a stock is bought at less than its value can price increases that exceed incremental increases in value be justified.

Investing is the intention to seek a required rate of return (RR) relative to risk, based on an assessment of value.

Investing in stocks is not about buying scrip that will go up and down in price, but about investing long term in a sound business that represents good value at its present price.

Investment, speculation and gambling

It is commonly thought that investment, is good for everybody and at all times. Speculation, on the other hand, may be good or bad, depending on the conditions and the person who speculates.

It should be essential, therefore, for anyone engaging in financial operations to know whether he is investing or speculating and, if the latter, to make sure that his speculation is a justifiable one.

Investment, speculation and gambling (Security Analysis, Ben Graham.):

1. Graham defined investment thus: An INVESTMENT OPERATION is one which, upon THOROUGH ANALYSIS, promises SAFETY OF PRINCIPAL and a SATISFACTORY RETURN. Operations NOT meeting these requirements are speculative.

The difference between investment and speculation, when the two are thus opposed, is understood in a general way by nearly everyone; but it can be difficult to formulate it precisely. In fact something can be said for the cynic's definition that an investment is a successful speculation and a speculation is an unsuccessful investment.

The failure properly to distinguish between investment and speculation was in large measure responsible for the market excesses and calamities that ensued, as well as, for much continuing confusion in the ideas and policies of would-be investors.

2. Graham's addition criterion of investment: An investment operation is one that can be justified on BOTH QUALITATIVE and QUANTITATIVE grounds.

Investment must always consider the PRICE as well as the QUALITY of the security.



Main points:______________

INVESTMENT OPERATION: rather than an issue or a purchase.

PRICE: is frequently an essential element, so that a stock (and even a bond) may have investment merit at one price level but not at another.

DIVERSIFICATION: An investment might be justified in a group of issues, which would not be sufficiently safe if made in any one of them singly.

ARBITRAGE AND HEDGING: it is also proper to consider as investment operations certain types of arbitrage and hedging commitments which involve the sale of one security against the purchase of another. In these rather specialised operations the element of SAFETY is provided by the combination of purchase and sale.

THOROUGH ANALYSIS: the study of the facts in the light of established standards of safety and value, including all quality of thoroughness.

SAFETY: The SAFETY sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations. A safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies. Where study and experiences indicate that an appreciable chance of loss must be recognized and allowed for, we have a speculative situation.

SATISFACTORY RETURN: is a wider expression than "adequate income", since it allows for capital appreciation or profit as well as current interest or dividend yield. "Satisfactory" is a subjective term; it covers any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.

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For investment, the future is essentially something to be guarded against rather than to be profited from. If the future brings improvement, so much the better; but investment as such cannot be founded in any important degree upon the expectation of improvement.

Speculation, on the other hand, may always properly – and often soundly – derive its basis and its justification from prospective developments that differ from past performances.

GAMBLING: represents the creation of risks not previously existing – e.g. race-track betting.

SPECULATION: applies to the taking of risks that are implicit in a situation and so must be taken.

INTELLIGENT SPECULATION: the taking of a risk that appears justified after careful weighing of the pros and cons.

UNINTELLIGENT SPECULATION: risk taking without adequate study of the situation.