Investing v.s. gambling, have you ever wondered what’s the difference?
Some people might say that if you were to invest, it’s practically the same as gambling. After all, people who put their money in the stock market often call themselves investors. Well, investing isn’t like gambling if you know what you’re doing and there is a key fundamental difference between real investors and gamblers (or market participants).
Hot Stocks or Quality Business?
Gamblers (or market participants) often make their buy or sell decision based on what others are buying. They take ideas from what other people talk about, or any stocks that is considered “hot” at the moment. Without considering the underlying entity of what they are investing in, they simply buy the stock and hope that the price appreciates.
On the other hand, real investors understand that behind every stock is a business ownership. When you buy a stock, you are essentially buying an ownership of the business. So for example, when you buy Facebook, you are essentially an owner of Facebook’s business. When you truly internalise this point, you will start asking important questions — questions relating to the fundamentals of the business that you are buying. You will consider whether the price you are paying for the company is worth every cent that you’ve paid. To put it simply, as a real investor, you are attempting to buy a good company at a fair or undervalued price.
When Stock Price Falls
How do you feel when you see a fall in a certain stock price? Do you have the tendency to feel scared towards the stock, or do you feel particularly excited? Both of these feelings are what market participants often feel when dealing with a fall in stock price. When you do not know the fundamentals or value of the stock you are dealing with, you’re more likely to be afraid when it falls. You will start to doubt your decision, and feel at a loss of what to do. If you already own the stock, you may even be tempted to sell the stock at a loss.
Worse still, you may feel a rush to buy the stock. When you do not know the value of the stock, a decline from the previous high may lead you to think that it is a good opportunity to buy the stock. If you already own the stock, you may also opt to wait, as you think that the price will rebound to its previous price. This is very dangerous, as what you are relying on is the history of the price of the stock. We know that historical performance does not guarantee future performance. If you do this without knowing the real value of the stock, essentially, you are hoping for others to be as (if not more) irrational as you, thus driving the stock price back up. It may not happen.
On the other hand, real investors know the value of the stock that they are buying. They understand the underlying business of the stocks they are buying. If there is an unfavourable change in the underlying business which results in decline of share price, they will not hesitate to sell, even at a loss. They do not wait for the price to rebound or treat it as opportunity, because there is no underlying reason to support it. However, if the fundamentals of the stock is still intact, they will treat it as an opportunity and buy accordingly. Real investors understand that price is what you pay, value is what you get.
Reaction to Volatility
When you see the price of the stock you bought rise or fall, what would your reaction be? Would you feel excited when it rises, and disappointed when it falls? Gamblers often have this feeling when the stocks they buy behave like that, and on the other hand, real investors tend to feel indifferent towards stock market volatility. If you’ve ever wondered why, it’s because real investors understand that volatility is a norm in the stock market it is through such volatilities that good opportunities present themselves. They will use the market’s volatility to buy good companies that they are aiming at the right valuation.
Hopefully you now have a better understanding the difference between investing and gambling. The truth is that there is wider spectrum between the two groups of individuals. See…for gambling, there’s a higher chance of making losses because you’re simply leaving it to the laws of probability. On the other hand for investing, you’re letting your hard earned money grow for you in safe and consistent manner. To enhance your skills and behaviour as an investor, why not attend our complimentary value investing masterclass and learn how to start investing in Singapore.
If you’d like a head start before attending the workshop, or even just for the purpose of gaining knowledge, do check out our ultimate guide to start investing!