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What you’ll learn are how investing is different from gambling, how it’s similar to gambling and why real investors are far from gamblers!
I just returned from Las Vegas. I’m not a gambler, mainly because I respect how much effort it takes to make money. I did however sign up for a card to get a discount at a nice restaurant and along with that came a guaranteed ace. So I did find myself seated at a blackjack table with some chips in front of me. I accepted the guaranteed ace and was dealt a 21. I left the table up $2! Lol! That shows you what a gambler I’m NOT!
That got me thinking, some people have told me they think investing in the stock market is gambling and I wanted to address that and why I don’t agree with it.
Investing is a legitimate way to grow money and compound at higher rates.
– My 5th Step to Wealth
– Necessary to get higher rates to retire comfortably and build wealth.
2. You’re investing in companies, not making a wager.
– If done correctly, shouldn’t be all or nothing
– Gambling is win/lose on each wager
– Investing in stock options, betting on the direction a stock’s price will move, is more of an all or nothing bet because options can expire worthless.
– You are limiting the amount of loss to the amount you pay for the option.
– Closer to the definition of gambling perhaps.
– Other option strategies include writing or selling an option on an underlying stock you own. that is a more conservative strategy. You can generate income from writing options against the stock. It’s low risk and provides income.
3. People who think investing in the stock market is gambling don’t understand how it really works. Some people do treat it like gambling because they haven’t taken the time to learn how to invest properly. They buy a stock on a “tip” and hope it “wins”, like spinning the roulette wheel. But for BWS listeners, you know that stocks go up because earnings are increasing. You want to find a company that has increasing sales and profitability. One that’s growing and can go from a small fish to a large whale over time. That’s not from luck or a tip, it’s from studying the numbers and understanding what makes stocks go up. If you haven’t yet listened to podcast #47 about what makes stocks go up or podcast #125 about Apple and when to sell a stock, go and listen before you invest, otherwise, perhaps you are just gambling.
Real investors are learning the metrics of companies – as I mentioned, sales, revenues, profits, earnings per share and net income. Warren Buffett reads the company’s annual report before investing and looks at all the numbers, ratios, and statistics of a company. If he likes the numbers and the stock price is significantly below what it’s worth, he invests. It’s buying stocks on sale.
I will say gambling and investing do have one thing in common – that’s managing your emotions and not letting them get away from you. To be a good investor, you have to keep a cool head and think like a contrarian. When stocks are down, that’s a good thing, they’re on sale. When they are up, it’s riskier and something to monitor. Too often, investors are jumping in when a stock makes a new high because they let their emotions run away from them. A better plan would be to make sure the numbers are good, then buy on a pullback. You want to think differently than the crowd. Thinking like an investor and not a gambler will certainly serve you well in your wealth building.
Your action step for today is to pick a company you might consider investing in and study it. Find out how it’s earnings have been performing. Have they been rising at an increasing rate? What does their product pipeline look like? How much debt do they have compared to equity? Are they #1 in their market or a competitor that has the opportunity to become #1? Arm yourself with the facts and take the emotion – and the gambling – out of investing.
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