Wednesday, August 15, 2007

Investor or Gambler?

Tom from InvestorGuide.com sent me an article of his to read regarding the differences between investing and gambling. Tom did a great job in discussing the two terms fairly. Very hard to write an article like that without exposing unknown biases.

I did find a couple of very minor areas where I disagreed with Tom's article. I shared those comments to Tom in an email. But, felt those comments would be helpful to readers of this site. First read Tom's article. Then my comments below...
Tom's article:
There's a big difference between buying a stock after thoroughly researching it and buying a stock by hitting it on a dartboard.
My comments:
Is there really a big difference...in outcome? Sure, the person may feel different about the investment...but based on outcome alone...historical evidence would suggest the odds of success are approximately the same.

Tom's Article:
Gambling - "Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following...no net economic effect results."
My comments:
I would argue that each player in the stock market provides a positive economic effect. The investor provides long-term capital to companies in need of capital. The speculator and gambler provide liquidity. Sure there are negative effects from all players...investors prop up some companies that probably shouldn't receive further funding...and will eventually go bust. And speculators/gamblers can turn liquidity into a frothing market that can cause long-term problems after the swell has subsided.

Of course, your point is true that gamblers' short-term trades may be a net effect with each other...but that activity regardless of reason or length of hold...still provides liquidity for other players in the market.

Basically, remove any player from the game...and the market wouldn't be what it is.
That's it from here where I've got a softball game to prepare for this week. I haven't played softball since my college days. And haven't thrown many balls since my shoulder surgery. Should be an interesting show to say the least.

Later Trades,

MT

2 comments:

Grow Your Funds said...

A very interesting debate, that will never be solved one way or the other. I think that there are different forms of gambling and different forms of investing. I tend to think of some forms of investing being gambling, and some forms of investing are completely different from gambling (long term investments).

Aaron
GrowYourFunds.com

Michael Taylor said...

Aaron,

Thanks for the comments. Yes, I agree with you. I liked Tom's post regarding gambling is betting money when the edge is against you. Investing is when it's with you.

Of course, the only problem with that argument is many traders/investors feel they have an edge. And for some time may get confirmation of that edge. Only to find out later during one of the market's many moods...they have no edge at all.

Have a great weekend,

MT