Tuesday, September 30, 2008

Investing vs Gambling

A friend of mine had asked me for basics of how to invest in the stock market. I'm writing some basic fundamentals but they will probably be seen as near-heretical by most financial professionals. Neverthless, here it is.

When people talk about "investing" in stocks, they can mean one of two things (1) short-term, which means they do things like trying to time the market such that they can buy stocks for cheap and sell them for expensive and (2) long-term, where the investor simply takes advantage of the fact that, over 20+ years or more, the stock market will tend to do better than not.

The reason why people like to do short term investing in stocks is precisely the reason why I think it's a terrible idea - because stock prices fluctuate a lot over the short term. The basis to short term investing in stocks is that every company's stock price fluctuates because of factors inherent in the company or in the market as a whole. Know enough of the factors, predict them accurately, and you have a profit on your hands.

I think this is a load of baloney.

What you are trying to do with short-term investing is that you are trying to make an accurate prediction given incomplete information. So is everyone else. The only time someone has a fairly complete picture is when the stock market actually takes everyone's incomplete picture and turns it into a price. Sometimes you win, sometimes you lose.

Oh wait. Does that sound a bit like picking a winning horse at the turf club?

The reason why people like talking about playing the stock market in this way is because it gives them the illusion of being better than everyone else. People love talking about how much money they've made in the stock market, TOTO, 4D etc. It's riches, quick and easy, and socially affirming to boot. What they don't tell you is how much they have lost investing in stocks over the long run. I doubt they know themselves.

So the first question you need to ask yourself when you are investing - are you really doing it to invest in your future? Or are you doing it to be fashionable and make a quick buck? If you are doing it for the latter, I have no advice for you. I don't joke about money. If you're doing it for the latter, I'll write more.

Otherwise, I advise you to find some other person. There's a money manager I can introduce to you. :)


The Disappearing Man said...

I like how you think. This discussion reminds me of Paul Ormerod's "The End of Economics", which is an extended study of just these principles.

Short-term investing is gambling. That's it.

For a young person starting out with little capital, I'd say the best investment you can make is in yourself. Education, training... take courses, learn as much as you can, pick up certification. These are all transferable skills and will make you a more valuable employee, or a better entrepreneur. Ultimately you'll be able to leverage those to make a better, more secure living.

Oh, and get your insurance young, while premiums are low.

Khayce said...

I would say that basic investment skills are essential for the young person, but really, the skills are quite no-brainer. Put aside part of your money, stick it in a bank account, don't touch it until you are 50.

BunnyButt said...

Hey Khayce,

I should direct a lot of people do your article! You have no idea how many people have been asking me to "play the stock market"!

I'm pretty cautious myself - only long term savings plans for me!


Pendragon said...

Souds like a plan.

Chuang Shyue Chou said...

Have you read 'A Random Walk down Wall Street'?

Khayce said...

Shyue Chou,

Nope. I'll pick it up next opportunity I get.