Is Trading Stocks Gambling?
I was addicted to gambling for most of my life. You can listen to my story here.
I had a problem with gambling. It took a while but I eventually gained control of my life and stopped gambling (and drinking).
Now I love life and everything is awesome.
But I’m not saying that there is anything wrong with other people gambling.
People gamble all the time.
I’d like to think the majority of people that gamble, do so with money they don’t need.
I’m talking about extra money.
Money that you can lose and still have enough left to pay your rent, and buy groceries.
Unfortunately, many people don’t treat money they spend trading stocks in the same way they would treat money they put in a slot machine.
But the truth is that trading stocks is gambling.
BUYING AND HOLDING IS NOT TRADING
I own a few stocks outside of my portfolio of exchange-traded funds(ETFs).
The stocks I own are considered blue-chip stocks which means they are very stable, and likely to slowly increase in value in the long-term, while paying quarterly dividends as they grow.
I buy these stocks because I like dividends.
I buy them for the income they generate and because, for now, that income is reinvested automatically to buy more stocks.
I’m not planning on selling my stocks when they get to a certain value.
In fact, I don’t ever plan on selling my stocks.
This is called a “buy and hold” strategy.
This strategy works best with dividend-paying blue chip stocks like the ones I own.
I CAN BUY AND HOLD NETFLIX STOCK, CAN’T I?
You can buy and hold any stock but you have to be ready for the possibility that Netflix might be just a flash in the pan. With new technologies, it’s really difficult to predict which ones will be around for a while, and which ones will go bankrupt.
Anyone remember Blockbuster Video? Yeah, me neither.
Let’s travel back in time to the days of the dot com craze.
“Invest in websites!”, everyone said. “You can’t go wrong!”
People invested millions and lost everything when the dot com bubble burst.
If someone comes up to you and says something like:
“X stock/company is really hot right now. If you get in now you’ll double your money in a month.”,
that’s called gambling.
You don’t really know whether you’re going to double your money or lose it all.
Remember that’s always a possibility. But people like to look at the positive, not the negative.
HOW CAN I PASS UP THIS OPPORTUNITY? IT’S EASY MONEY!
If someone says something is easy money, that’s gambling.
If you have an extra $1,000 laying around that you don’t need for groceries and baby clothes and you can afford to lose it all and not ruin your life, please go ahead and “invest” in the hot stock.
It’s your life and you should be able to have fun any way you like.
But don’t kid yourself that you’re actually investing. You have just placed a bet.
You are buying something that may or may not increase in value in a short period of time.
When (if) it does increase in value, you’re going to have a choice to make.
Do I hold onto it and hope that it gets bigger?
Or do I sell it now and take my winnings and run?
This is the situation at every casino in the world right now.
BUT I’VE DONE MY RESEARCH. I BUY UNDERVALUED STOCKS AND THEN SELL THEM WHEN THEY GROW. I HAVE CONSISTENTLY MADE MONEY DOING THIS.
If this is you, then fantastic. You’re probably one of the few people who are skilled at trading. Like Warren Buffett or the people who actually make a living playing in poker tournaments.
But let’s be honest – if you’re reading this – you are probably not that person.
Instead, you’ve maybe heard about people doing this and you say: “I can do it too! I’m smart!”
You’re totally smart, there’s no question. But do you have the time, energy, knowledge, and, let’s face it, luck, to pull this off?
Are you really looking to risk it all, and spend your days watching the markets going up and down and up and down?
If you still say yes, then I can’t stop you. But before you get into it, just be crystal clear that you are gambling.
THERE ARE NO GUARANTEES
Even with exchange-traded funds(ETFs) or my buy-and-hold stock dividend reinvestment example, there are no guarantees.
If you agree that trading = gambling and decide to go the safer route like I’m suggesting, it’s still not perfectly safe.
Yes, the likelihood that over a 30 year period your money will grow on average 5-7%, is high, but it’s not guaranteed.
As I wrote in Financial Literacy Series: Investing vs. Saving, between 1950-2009, the stock market average annual return was 7%.
Some of those years were +20% returns and some were negative returns. The average over 59 years however, was 7%.
When I’m talking about the lack of guarantees, I mean in the short term.
Never put money in an investment if you need to spend that money in a year, or even 3, or 5.
Because here’s what’s going to happen to you: it’s 2008 and you do the right thing and put $10,000 in safe, balanced investments, that follow the direction of the stock market.
The 2008 financial crisis happens and the stock market goes down by 9%.
You need that money to buy something now and you sell your $10,000 investment for $9,100.
Feels good, right?
No it doesn’t. It feels horrible.
You now have less money than you did when you started investing.
Guess what? That’s gambling too.
Investing money that you might need to use in the short term, is taking a huge risk that we aren’t about to hit the next financial crisis in the next few years
SO BASICALLY EVERYTHING IS GAMBLING?
Ok, it’s not the same kind of gambling that almost ruined my life. It’s not like feeding quarters into a slot machine. But just think about it for a second.
Do you have a crystal ball?
Can you see the future?
The answer to those questions is no.
So every decision you make is really just hoping that things will progress as they have in the past.
But we can only guess that markets will continue to behave as they did in the past. We don’t actually know anything for sure.
When you put money down and hope that it grows, but you have no guarantees that it will, that’s a form of gambling.
Does it mean that you shouldn’t invest? No, it just means that you should be careful and not listen to the friend of a friend who bought Apple stock in 1979 and made millions. They got lucky. They’re not an investing genius.
So the best you can do is be wise, and try to balance risk and reward.
And save the gambling for your fun money, ok?