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Is There A Fine Line Between Investing and Gambling?

by Minority Fortune

We once heard an individual describe stock market investing as “sophisticated gambling”. Depending on who you’re looking at, it may or may not be true. First off, let us give our definition of gambling. Gambling is when an individual is up against high odds of a return and facing an infinite range of unknowns. An example would be an individual who buys scratch off or lottery tickets in hopes of scoring a big win by chance of luck. The odds of them recouping their dollar are one in thousands and sometimes millions. This could indeed apply to some individuals who invest in the stock market too. Those who randomly choose stocks based on hype are gambling. Our definition of investing is when an individual purchases something after careful research and analysis in order to lower their risk and have a higher possibility of recouping the money made on their purchase. An example would be an individual who decides to purchase a commercial building at a bargain price after conducting due diligence, in belief that the building will generate a return within a certain amount of years. So, where do you fall?

Education

With every skill, there lies a barrier to entry. The greater the reward, the greater the learning curve. Investing in any arena is no different. Otherwise, everyone would be rich, right? As mundane as the task may be for some, if you can’t force yourself to do your due diligence and research, then you’ll want to refrain from participating until that knowledge is attained. Otherwise, you will find yourself gambling, with the odds against you.

Using a System

Investopedia notes that true investors have a system. The best investors on the planet have not traded on a whim system. They stuck to a system that tied together existing principles with their own discoveries. They all had the same thing to say: have a method, or you’ll drown. After educating yourself, you should take the techniques from Warren Buffet, Benjamin Graham, George Soros, and Peter Lynch to heart. You cannot go wrong by starting with the fundamentals used by the greatest investors in history.

Focusing on Wins

People who cannot take losses may want to avoid investing in higher risk markets. Realize that if the big investors and institutions take losses often, then you certainly will too. The key is to realizing it early and getting out when the signs present themselves. It’s all too often that we’ll hear of an investor who took a loss on an investment and refused to get out in hopes of recouping their loss. In the end, they lost the entire investment based on their ego and refusal to take the loss. Losses don’t equate to your capability. Remember that.

A Thin Line

Gambling and investing can often morph over into the other. There are seasoned poker players that live lavishly off their craft. There are also investment bankers with poor fundamentals. There are even wealthy sports players who foolishly gamble away their wealth in the casinos (*ahem* Antoine Walker). At times, we gamble with every aspect of our lives. The key is to reduce the potential for loss. The higher the odds, the more caution you’ll need to use. Many people make the mistake to think that by trading alone you are an investor. Without the proper education, system, or maturity, you are simply gambling. Therefore, always invest wisely.

You Answer: Do you think there’s a fine line between investing and gambling? Do you have any examples of such?

*Image courtesy of ERproductions Ltd.
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