Stop Gambling and Start Investing!

Here’s why investing and gambling are not to be confused.

For many investors, there is a thrill associated with buying and selling shares. This is not dissimilar to the feeling experienced when gambling on a sporting event, since it includes elation when a profit is made and despair when a loss is incurred. However, while gambling and investing share the same raw emotions of fear and greed, they are very different in other, more relevant ways.

In fact, it could be said that successful investors are not gamblers. A key reason for this is their focus on the long term rather than the short term. The most successful investor on earth, Warren Buffett, says his favourite holding period is forever and that he invests assuming that he won’t be able to sell for at least five years. This contrasts with gamblers for whom the outcome of the event they have placed a wager on will usually be known within a short space of time.

However, many new investors adopt the mentality of a gambler when buying and selling shares. For example, they are often willing to hold shares for a period of months or even just weeks. Considering that the business world moves slowly, this is simply not enough time for a new strategy or product line to positively catalyse a company’s earnings. Furthermore, being overly short termist means higher dealing costs since more transactions are undertaken.

It also means that, in many cases, inexperienced investors miss out on capital gains. That’s because they all too often lose money during bear markets and fail to make money during bull markets. This is due to a short-term outlook, which does not see beyond the current crisis or beyond the current bubble. More experienced investors, on the other hand, try to look beyond the here and now at the potential for a company given its margin of safety and risk profile.

Successful investors also try to balance risk and reward. In other words, they understand that while the potential reward from an investment may be high, its risks usually will be too. Therefore, it is sensible to seek out a range of companies within a portfolio with diversification providing a degree of stability and resilience in case one company, one region, or one sector endures a challenging period.

On the other hand, gamblers often pile into a smaller number of companies. While this will increase their potential rewards, it can also mean that their losses mount up since no investor or gambler can be right all of the time.

Clearly, investing can be rewarding. However, in its most successful form it doesn’t offer the same level of thrill as gambling. Certainly, it is a great feeling when your portfolio generates a high income or large capital gains. However, investors seeking the quick thrill of a win are probably best advised to put a small amount of capital to one side and use that to fulfill the “animal instincts” which are brought out by gambling. Otherwise, they may find their portfolio performance is disappointing and their losing streak becomes akin to a sure bet.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »