20th century British economist John Maynard Keynes is famous for, among other things, associating the stock market with casinos. “It is generally agreed that casinos should, in the public interest, be inaccessible and expensive.” Says Keynes, “And perhaps the same is true of stock exchanges.” Many people agree with relationship between the two. Investing, they assume, is nothing more than a sophisticated form of gambling. In both cases, you are taking a risk with the hope of gaining something in return. People sometimes experience great gains in both gambling and investing. People also experience great losses in both gambling and investing. So, is there really any difference between the two?
Yes, I would argue, there is a difference. And the difference lies in the expectations and motivations of those engaging in the activities. When people go to casinos, it typically is not a financial endeavor. Sure, they hope to win and it’s a lot more fun if they do. But the fundamental motivation is to have a pleasurable experience. They are paying for the privilege of playing a game. Most people who gamble are well aware of their slim chances of winning back what they pay, but they go ahead and gamble anyway.
Investing, on the other hand, is all about the return. It’s not a game. It’s a well-reasoned, carefully determined placement of financial resources. Investing is more like providing a loan. When you invest, you are loaning out your money at interest to the market. You don’t merely hope to get a return, you expect it.
Need more evidence that investing and gambling are not the same thing? Consider this. You have a substantial amount of money that you wish to multiply. You determine that you are going to invest it, but you don’t know where. A financial advisor comes along and makes a simple recommendation. “The casino up the road has a really great promotion going on right now.” He says, “The potential winnings are through the roof. Just give me your money and I’ll take it to the casino to invest it.” Would you give this financial representative your money? I’m guessing that you wouldn’t. But, if gambling and investing are the same theory, why not?
While it is obvious to me that gambling and investing are fundamentally different, it is true that they can be very similar–if you make investments for the wrong reasons. I’ve written before about the dangers of making investing decisions based on stock picking, track record, and anecdotal evidence. When you make your investment decisions based on irrational judgments, you are–for all intents and purposes–gambling. A gambling addict continues to play the game due to a belief that he or she is lucky. In the same way, investors often fall into the trap of latching onto a particular stock or industry–thinking that it holds some magical quality.
When it comes to your financial resources, you don’t want to be a gambler; you want to be an investor. Invest for the right reasons and avoid the irrational pitfalls that many investors make. To find out how to do this, feel free to contact us for a free consultation.