Are you a gambler, or an investor? Or, more importantly, do you think you are a gambler or an investor? Self-perception and actual truth may be different, as we often tend to look at ourselves differently than others see us.
Let’s take an objective look at a gambler’s portfolio and an investor’s portfolio by asking ourselves key questions:
- Is your portfolio diversified? A gambler will have one or two “heavyweights†in their portfolio, while the investor will probably have a mix of ETFs and mutual funds in addition to cash and a diversified stock portfolio. This is not always the case. The real question is why the gambler has one or two heavyweights. Are they seeing upside and downgrading the risk involved? If so, they are gamblers, as they are essentially guessing that their one or two big plays will make some serious money for them.
- How much cash do you have? An investor will almost always have some percentage of cash on hand, even if it’s only 5 per cent of their overall portfolio. Some have as much as 50 per cent or even more! Gamblers will often put their entire portfolio to work on a select few investments. This is risky, even in a bull market, because there is to room for error—if the stocks pull back, or if the market hits a rough patch, there is no way to average down and buy more at a lower price.
- Why are you buying in? If you are making regular contributions to a fund or an ETF that you believe has the potential to grow over time, then you are an investor. If you are purchasing in the short-term (like a month, days, or even minutes) then you are making a guess as to how the market will perform. Even with all the fancy computer models, software, charts and analysis—it’s still a guess. An investor is also taking a risk, but that risk is over a much longer time horizon (like years or even decades).
Is one type of investor better than the other? Not really—many people are very good at timing the market, taking calculated risks and weighing in large positions. There are lots of gamblers out there, and many are successful. Problems usually arise when someone thinks they are an investor but behave like a gambler. It’s all about expectations. For example, if you are a successful day-trader, no amount of “investing†advice will help you change, since you are trading quickly, using the tools that you have at your disposal and (hopefully) making money doing it. There are lots of successful gamblers out there. But make sure that you know what you are doing before you start acting like one.
I think it's not really a question of which, but when and by how much. I feel that as I invest and learn, I become less and less a pure investor and more and more a slight gambler. For instance, I am still at about 75% cash right now, with 25% in AAPL, I just haven't been able to convince myself to put the other 75% back into my ETFs and other investments (as I sprint away from REIT investments). Having purchased two large lots of AAPL at 160 and 165 last month, I have trailing stops set to save me there as well. I think the fact that I have no diversity makes me a gambler right now, but my goal is to wait out the turmoil and diversify back into a more stable market when the dust settles, which I believe is an investor's strategy. Even if it relies on a little bit of a guess about when the dust is actually settled (2009). Would holding an QQQ or SDS for a year or so make me more an investor or a gambler?
Good timing for this post. I was just exchanging emails with a friend who said he's about 50% in tech stocks right now. He's never denied being a gambler.
I'm probably a mix of both, but like to think I'm more of an investor.
I would think the vast majority are hybrid investor/gamblers. It seems too hard to do both. I like to buy beaten down or undervalued securities that seem too cheap over the long term and hold onto them. But I think I'd go crazy without some kind of short-term speculation to keep me occupied. Whether that's with small/micro-caps, or aggressive growth, or something else, it's a smaller overall percentage of my portfolio but compared to my long-term holdings, however individually those positions can sometimes be my largest ones.
This post was very Dr. Brett over at TraderFeed by the way. Nice job.
Good post - I think a true investor also keeps a close eye on both transaction costs and fees associated with their mutual funds (which can kill portfolio returns).
Also, they understand the power of using derivatives such as stock options to hedge risk and generate income vs. make excessively risky and leveraged trades.
I tend to be both a gambler and investor. To me it is just a matter of the market conditions. For example, during the first half of the year I probably leaned more to the gambler side; however, when the market is so volatile like now I lean more towards an investor.
I think we are all a mix of both! We all speculate as to what will happen in the future with a particular company or industry... informed speculation (would it still be called speculation?) is one key to getting a good investment return. I speculated that as the price of oil went up (and I knew it would with supply/demand, china/india, USD going down, extreme inflation) that alternative energy companies would start to thrive. I also speculated that the dollar would start going down due to inflation, printing of money and lowering of interest rates, and based on that thought that many commodities (listed in USD) would go up in value in USD terms. I even speculated that the first rate cuts wouldn't work out as planned...
Depsite all my speculations... I still only pull the trigger on an investment when its a sound company... my business background is used heavily to decide on particular investments... but I speculate about industries and the future but I invest in particular companies. Does that make sense?
trading any sort of commodity is educated gambling IMO
I've actually written an article on the matter myself. The main difference between and investor and a gambler, in my opinion, is diversification or using statistics in your favor.
When buying a specific financial asset, like a stock, we are basically gambling on the financial results of that stock. The odds might be in our favour as we have analysed the firms finance and business but we are still talking about odds or risks.So, whether we like it or not, buying a specific financial asset is gambling.
I try to keep my gamble checked at the poker table. My investments are in ETFs and I stick to my asset allocation and just add to my positions 4 times a year.
Do you guys have a recommendation section, i'd like to suggest some stuff