Tuesday, April 19, 2011

Investing or Gambling? Part 10: Conclusion

During the past 9 weeks, we have presented a series of articles questioning whether investing and gambling are synonymous.
  • Week 1, we provided an overview of the topic and laid out an outline of the posts to follow.
  • Week 2 we defined investing and gambling. We noted the three main distinctions that an investor has verses a gambler: ownership of an asset; value derived from market demands; and option to sell. We also summarized the two similarities: success is based on probabilities; and the future outcomes are unknown.
  • In Week 3, we discussed why this topic is important at this time. We pointed out that because of the weak U.S. economy, many people are desperate to earn a living and that temptation to invest and gamble is everywhere.
  • Week 4 concentrated on the differences between investing and gambling. Again, we reiterated that investing involves ownership but gambling does not. Also, we indicated that gambling infers fun while investing infers work.
  • Week 5's article focused on a few of the successful gamblers and investors or our time. Most of these individuals are currently earning substantial livings concentrating on both of these disciplines. We pointed out that most: were very highly educated and possessed a deep knowledge of mathematics; worked very hard to refine their skills; and dedicated many years of their lives to perfecting their livelihood.
  • In Week 6, we presented the various investment products that investors and gamblers have the options buy or play. Investors can be conservative and focus only on CDs or Bonds, or they can get excitement and thrills buying derivatives, commodities, collectibles, or other unique items. Gamblers can also vary their risk by buying lottery tickets, analyzing sporting events, playing board games or casino poker.
  • Week 7's discussion focused on the profile of typical investors and gamblers. We noted that  successful gamblers were more: in control of their spending; optimistic about the future; and were more prepared for retirement. Both professionals were highly educated and made analytical decisions. Neither view their profession as gambling.
  • In Week 8, we indicated the two mathematical skills that both investors and gamblers possessed were the ability to mentally: construct complex decision trees; and know the probability of success of each outcome by heart.
  • Lastly, Week 9 presented the concept of manipulation in the two different industries. Our current belief is that the gambling industry is more regulated and less likely to be manipulated. Whereas, the investment industry is regulated only on a macro level, which leaves the doors to manipulation wide open.
In our opinion, we believe that investing is much more risky than gambling is to the common man. Both professions are comprised of individuals whose sole purpose is to earn a substantial amount of money. Those who gamble usually understand their odds of winning and of losing. They typically wager small amounts of money and participate for the enjoyment or entertainment factor.

However, these same individuals invest comparatively large sums of money in the stock market and 401k accounts. Rarely do they understand the products they are buying or the potential risks of losing money. Far too many people have lost their children's educational funds during the collapse of the dot.com bubble, and are now underwater on their home's real estate investment.

Those who are against legalized gambling will point to the losses of the compulsive gambler, saying how those individuals are sick, irresponsible, and have lost everything.

Yet the losses of our entire population during the recent financial meltdown serve as a lesson in understanding risk. We truly believe that you should never buy anything that you do not understand, and more importantly, never invest with only the hope of attaining a win-fall, because this is when investing becomes simply another word for gambling.

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