Investment Pitfalls: Are You Falling for These Common Gambling Traps?

One of our long time readers submitted a great question..."How do you differentiate between gambling and investing?" I love this question for some many reasons...it really gets to the heart of investing and financial security.

Lady Luck is a Brutal Mistress

You see, my dad was a bit of a card shark. He was all about finding the perfect strategy to beat the house at blackjack. He'd buy systems, software, and even trained himself to count cards. He was convinced that with the right system he could beat the house...Now, I'm not saying this is the right way to go about things, but it does bring up an interesting comparison to investing.

See both gamblers and investors ride a roller coaster. Both will talk about "paper losses" and the whims of lady luck aka the "market." And on the surface, there are folks out there who make their living gambling. They've got their systems, their strategies, and they seem to consistently bring in winnings. Heck, the IRS even has a box on your tax return for gambling winnings. But does that make it a solid financial strategy? Well, not necessarily.

The thing about gambling is that it inherently involves a certain amount of chance. And that's where the difference lies. Is your investment strategy based on chance, or is it based on statistics, probability, and a certain amount of financial savvy? Take a second a think about it. Often the first question I ask investors is, "what is your strategy?"

When you're investing, you want to be sure that your strategy isn't based on the whims of the market. It should be based on facts, logic, statistics, and probability. Without a sound strategy that is designed to win in both the good and bad times...you might as well be gambling.

Investing Does Not Involve Chance

When it comes to investing, I don't see the stock market as a lottery ticket. It's not a game of chance where I might make money, or I might not. When I put my money into the stock market, I know I have a near certainty of making money. In fact, over the long run, it's pretty much guaranteed.

But folks, that certainty doesn't come from luck.

It comes from understanding the stock market, understanding what drives its growth and value. It's easy to go in there and pull the lever, buying this stock or that stock without any rhyme or reason. But if you do that, you could end up buying losers every single time. You could lose all your money. You could go bankrupt.

But if you're smart about it, if you play the odds in your favor, you can win over the long run. And that's the advantage you have in the stock market that you don't have in a casino. In a casino, the games are rigged against you, given enough time the house will always win. But in the stock market, you can be the house...in fact, everyone can be the house...because the stock market isn't a zero sum game. The stock market does not require winners and losers.

Isn't The Stock Market Over Priced?

Often times, I get the question, "But, Leibel, Isn't the stock market overpriced? Isn't it going to come crashing down?" And here's the answer I always give...and it's really one of personal time horizons.

Over the long run, as long as the United States is a growing concern, as long as we have a functioning economy and people are having babies, I know the stock market is going to continue to grow. It's a product of our society, of our world.

When people have babies, those babies consume products and goods created by companies. Those companies raise money from those same people. Hence the price goes up, the value goes up, and the stock market grows. It's a beautiful cycle, and it drives the growth of the stock market. In fact, indirectly, this overall growth is the primary job of the Federal Reserve. Their number one job is to ensure that our economy grows at a sustainable rate...which is great.

Of course, if we zoom in and try to pick the next Uber, the next Tesla, the next Facebook, that's gambling. Statistically speaking, you're not likely to get that right. Instead, we need to be betting on people. We need to be betting on the human race as a whole, not on individual companies.

When you start looking at the broader strokes of how economies work, that's when investing stops being gambling. That's when it becomes a strategic, calculated move to secure your financial future. And folks, that's a bet I'm willing to make every single time.

A Failure to Plan is Planning to Fail

Another key difference between gambling and investing, is in the plan. Investors have pre-written plans that tell them exactly when to hit it and when to stay. Or investor speak, they have an Investment Policy Statement. A policy that says, what they are doing, why they are doing it, when they will harvest their gains, and when they will take their losses.

Don't mistake your investment policy for a gamblers plan. Gambler's have plans to...the difference is that your investment policy needs to be rooted in reality. It needs to be based on a probable outcome for the future. You need to have that statistical probability that guides your vision of what the future will look like. Your investment policy statement should outline what you need your money to do, how you're going to make it do that, and the statistical probability of it happening.

But here's the kicker, folks. Your policy also needs to tell you when you're wrong. Because let's face it, there are going to be times when we're wrong. When interest rates start increasing for the first time in 20 years, when a global pandemic makes every developed nation rethink their reliance on third-world countries, or when a major world power decides to go to war with a smaller country. These are all events that can make us reconsider our investment outlook.

So, your investment policy needs to account for these potential changes. It needs to be a part of your plan, and that plan needs to be based on probable outcomes for the future. Because at the end of the day, investing isn't about predicting the future. It's about preparing for it. And having a solid, reality-based investment policy is a crucial part of that preparation.

Your Guide To Success

Now folks, there are a couple of common mistakes I see when it comes to investing.

1. Have a Plan (Investment Policy)

The first one is not having a plan at all. That's a big no-no. You wouldn't set off on a road trip without a map, would you?
 

2. Define Your Needs and Comfort Zone

The second mistake is being too simplistic with your plan. I've seen people who say, "I've got my 401k, I'll just pick a target date fund and that's it." Now, there's nothing inherently wrong with that. As long as you're saving for retirement, you're on the right track. But what you're really doing is outsourcing your responsibilities to someone else who doesn't know you, doesn't care about you, and won't be impacted if their strategy doesn't work for you.

When you're creating your investment policy statement, you want it to be a reflection of you and your needs. And I'm not just talking about your financial needs. I'm talking about your emotional needs too. What makes you feel safe? What will make you feel like your retirement is worthwhile? These are questions your investment policy needs to answer.

3. What Will Trigger a Revaluation?

And here's the thing, folks. Your plan needs to be personalized for you. It needs to outline the things that will cause you to reconsider your strategy. And it needs to be something you're comfortable with. Because if something unexpected happens, you need to know what to do. You need to have a process to follow.

That's what's going to keep you from gambling with your money. It's what's going to help you make smart decisions. Because at the end of the day, investing isn't just about making money. It's about making the best decisions for yourself and your loved ones. And having a solid, personalized investment plan is a crucial part of that.

In Summary

So folks, as we wrap up our chat today, remember that investing isn't a game of chance. It's a strategic, calculated move to secure your financial future. It's about making the best decisions for yourself and your loved ones. And to do that, you need a solid, personalized investment plan.

Don't make the mistake of not having a plan or oversimplifying it. Your plan should reflect your needs, both financial and emotional. It should guide you when unexpected events occur and help you stay on track. Because, at the end of the day, investing is about preparing for the future, not predicting it.

Remember, folks, the key to successful investing isn't about beating the house or picking the next big winner. It's about understanding the market and using it to create the lifestyle you deserve.

Until next time, happy investing!