Skip to main content

Gambling vs Speculating vs Investing

I don't recall where I first heard this, but there is are important distinctions between gambling, speculating, and investing.

Gambling is knowing that you'll probably lose your money.
Speculating is hoping that you'll get your money back plus some.
Investing is knowing that you'll get your money back plus some.

You see, investing involves in depth research, analysis, and confidence that what you are buying is a good value and is earning a fair return. Investing is also knowing that you don't need to sell the thing to someone else to make money. It will make you money simply owning it.

Most people that look at stock prices and see the hot names increasing are just following herd mentality. It is the same frame of mind that lead people to buy tulips in the 1600s for obscene fortunes even though the flowers would die and become worthless, or buying baseball cards or Beanie Babies in the 90s (I admit to have gotten caught up in the baseball card fad), or tech stocks in the 1990s or real estate in 2006. 

You can't just follow the crowd when prices go crazy. You have to understand the value, the yield, and why you won't lose money and will in fact earn money. We are in one of those moments now where there are a lot of new, young investors speculators that think investing in stocks is easy and day trading can be a career. I fortunately had just gotten interested in investing in the 90s and saw what happened to all the day traders and speculators back then.

When pricing goes crazy, it requires a greater fool to buy from you to keep the price momentum. Everyone thinks the Fed is the greater fool this time and are bidding up prices accordingly. The Fed has certainly have acted like the greater fool recently, but I can tell you, there are limits to what they can do (even though they say there aren't). They have no way of bailing out every stock and bondholder without crashing the US Dollar and the global financial system with it. They will need to let prices eventually be priced for what the market can bear.

So be careful out their. Money is difficult to make, more difficult to keep, and the most difficult to grow. Be an investor, not a speculator. And please avoid gambling at all costs. This involves things that do not have an underlying value and are simply bets - things like stock options, casinos, and sports betting.

The only gambling I am personally okay with is betting for a team to win that I can't stand. Take the Patriots in the Super Bowl. I always bet on the Patriots to win the Super Bowl. If they win, I make money. If they lose, the emotional gratification of them losing the Super Bowl more than makes up for the money I lost.