The cornerstone of both investing and gambling is the anticipation of a return, the only thing is that it should be congruous with the risks undertaken.
It’s quite astounding to see many investors getting swayed by a wave of stock market volatility. Stock markets in India are similar to your ping-pong game, it’s quite obvious that the stocks will keep oscillating back and forth. But does the value or fundamentals of a company change with a 2-5% stock market movement?
Investing means putting money, effort, time, etc. into something to make a profit or get an advantage. And such investments can be in education/knowledge, financial assets, real estate, commodities, etc. Just like investments are not restricted to the financial world, gambling is not confined to casinos or betting in sports such as cricket, horse racing, or football.
While advising many investors on their investments, we encountered many who are otherwise successful in their respective fields, but not great stock market investors. On having a candid conversation with them, the correlation between an investor’s behavior and the stock market India fluctuations started getting unfolded. These investors smiled when the stocks rose but could not help themselves from fretting over a minor fall in the market price. If only they could think rationally and see it as an opportunity to build a portfolio of amazing stocks, they would be telling tales of their triumphs rather than investing woes.
Are you an investor or a gambler?
How can you distinguish between an investor and a gambler? An investor is like an IPL team owner who has made a solid investment in building a great team consisting of a proficient skipper, great bowlers, fielders, and batsmen. A gambler bets on the outcome without understanding the risks involved. Similarly, based on hearsay or stock market rage, many investors accumulate stocks without understanding the risks inherent or their business model. In investing parlance, just because they are equities, they term it as their stock market investments.
What differentiates ‘investors’ from ‘gamblers’?
1. Dalliance Vs. Marriage
For gamblers, buying and selling stocks is a frequent fashion, which is often reflected in their sky-high churning rates. On the other hand, investors in the share markets for a long-term stretch expect to create wealth from augmentation in the value of the underlying business. This makes investing a time-rewarding process, whereas gambling is often referred to as a time-bound event.
2. Guesswork Vs. Calculation
The hallmark of an investor is his ability to assess the risk versus rewards and take decisions accordingly. A gambler or a speculator takes a random risk such as throwing dice, so the odds of favorable returns are also very low.
3. Delusion Vs. Conviction
Investors have an intense affair with a company’s fundamentals. They are fixated on valuation ratios, P&L numbers, and balance sheet data. Gamblers are content with 20-30% gains and are deaf to the company’s underlying value. Also, because a gambler lays his wager based on hope or his own estimates, his confidence may tremble quickly. Whereas an investor will remain calm during the turbulent times in the stock markets. In fact, he will capitalize on such opportunities to buy sound stocks.
4. Irrational Vs. Rational
If a 15% surge in your stock electrifies you or a 5-10% nosedive in your stock is keeping you awake at night, you are a gambler. A long-term investor is detached from his emotions and swears by empirical data.
5. Incongruity Vs. Equilibrium
The decisions of a gambler trickle with the media hype, stock market fashion, etc. On the other hand, a true investor will carefully craft his portfolio across various sectors and asset classes. Well-balanced diversification is the biggest virtue of a long-term investor, and this risk management strategy will help him to curb the potential losses.
Speculation, gamblers, or investors can co-exist in the financial world. It is not wrong to gamble, however, undesirable if you are looking for long-term wealth creation. It’s essential to identify whether you are investing or outright gambling before you can plan your investment strategy.