If I had a dollar for every time that I hear someone compare the stock market to gambling, I could retire very comfortably. (And I’m nowhere near retirement age…)
Here's what I wonder whenever someone asks me that question, though:
Heck, let's talk about you!
Why are you asking this question or reading this article? Did you lose money playing the stock market and want to learn something? Do you feel an ethical dilemma and are looking for an answer?
I get it! I, too, am an investor in the U.S. stock markets — but I've been a gambler, as well. That’s right. You read that correctly. I am a professional in the financial services industry, licensed by the SEC, and I have gambled in the stock market. Let me tell you a story.
Tech stocks, which had never earned a penny in revenue, were exploding. So-called investors were addicted to day-trading, 21 years before AMC and GameStop shot to the moon powered by quarantined traders gambling their stimulus checks.
I was an MBA grad student at Mississippi College and wanted to study in London over the summer. But I had a problem – I had no money. I was a broke graduate assistant football coach paying for school on a scholarship.
One day, while playing golf with a buddy, a friend of his (an acquaintance, really) approached and started shooting his mouth off about a big deal going down.
"Did you hear? World-Com is buying Sky-Tel."
It was the deal of the century or at least it was to us. The man shared all the details like a fisherman describing the big one that got away. And the two gullible young men (me being one of them) were licking their chops.
We climbed back into our cart after he told his story, and I told my golf partner that I wanted to go to summer school in London, was taking a student loan for half of the cost, and was buying World-Com and Sky-Tel stock. I knew, with the confidence of a young man with no scars, that I would double my money.
I did my research (the story was already in the papers!), determined my strategy, and placed my bet.
I earned a huge return (it was big to me) in a few months, got a little money from my grandfather, and took off to London to study international finance at King’s College. I enjoyed the sights and sounds and more than a few pubs of one of the world’s capitals.
And I made the most of it.
I learned never to expect such a such tip again. In my twenty-plus-year career, I have never received another one.
Have I ever gambled on stocks again? No. Have I taken risks? Yes. But these were calculated and purposeful.
I am a financial planner and investment advisor who has planned with hundreds of clients, managed thousands of accounts, and invested millions of dollars. I have experienced gambling and investing and know a thing or two about both.
It depends on your heart and your mind. The answer lies in how you treat it and how you think about it.
For example, is playing college football gambling? Yes and no. It depends on who you ask. For the player on the field, it’s just a game. One he once played for free. For the frat boy in the stands, the bookie at the bar, or the geek behind his screen, it is gambling. The difference between the player and the gambler is clear. But both are playing a game.
The difference between the stock investor and the stock gambler is less clear. Their actions could be exactly the same. Both may have good systems or rely on luck. Both may try to hit the big home run or be satisfied with singles and doubles. But the difference typically lies in their heart and mind. So, let’s see how we can delineate between the two.
The stock market gambler has at least one of these three key characteristics. Of course, there could be others ...
The gambler's goal is money for money’s sake. A gambler will risk more than he can afford to lose to score a big win. Consider the degenerate betting his paycheck on the role of dice or the spread of a ballgame. Or a gambler will press his bets just to make more for the thrill of making more.
Think about the high-roller playing no-limit hold-'em or thousand(s) dollar Nassau. Both are drawn to the action and are addicted to the adrenaline. And neither have a purpose for the money, or they have forgotten their purpose and are playing a game.
A gambler just wants money for money sake and often has no plan or purpose for his profits.
A stock market gambler may have a winning system. In fact, good gamblers do. Many historical market gamblers have had renowned and widely copied systems. I’ve studied quite a few. But a stock market gambler rarely knows what he is buying. He doesn’t know if the ticker T is AT&T or Tesla and doesn’t care. He is just buying and selling the position.
This type of gambler does not care about ownership, stewardship, or the outcome that his buys and sells may create. He is just buying a position for profit, nothing more and nothing less.
The downfall of the gambler is that they personally succeed or fail with each profit and loss. When they bet on a winner and make a profit – they are a winner. And when they lose money – they are a loser. They deeply feel each move in the market. Let me give you an example.
Many years ago, a friend got a hot stock tip. This pharmaceutical company had “a miracle drug in the third stage of FDA approval.”
Again, if I had a dollar for every hot stock tip I’ve heard in my career, I would retire now, very comfortably. And I’m still too young to retire. But this company’s stock took off! It really did go to the moon. It grew 10 times and kept going. It was crazy…
The quick backstory is there was widespread speculation that this “miracle drug” had significant COVID-19 treating qualities though it was designed for other treatments. The speculation was unproven but that didn’t matter in the 2020 stock market.
I asked my friend to please sell his stock, and capture his profits. I told him that never in my career did I have a success story like his to tell others. I told him I was wrong when I recommended against it — he was right — it was the best stock tip story of my career…please take his profits so I had a good story to tell and more importantly, he had his profits.
He still captured a nice gain, but it was ho-hum compared to 10X or even 5X.
My friend had learned of this stock tip from guys in his golf group. It wasn’t special or exclusive information. They just enjoyed talking about it going up and down and badgering each other about their gains and losses. It was fun conversation and only a little serious. Until the stock exploded to 3X, then 6X, and finally 10X their investment. They started to feel like pros, envisioned it becoming as big as Johnson & Johnson, and setting their families up for life.
They wrapped their identity up in their profits.
And when you define who you are with your profits and losses, you have become a stock market gambler. And you are on the road to addiction, heartache, and loneliness (yes, loneliness).
Profits are good. Investment systems are a must. Trading stocks can be an excellent investment strategy. But gambling in the stock market is more of an attitude and philosophy or lack thereof, than the actions you take.
Money that is earned has a purpose in their life. There is a reason for the risks they takes. Money pays the bills, secures retirement, sends kids to college, and funds ministries or charities that serve those in need. Money is a tool that helps build new and good outcomes for the community around the investor and society at large.
Yes, an investor drives for profits, for big returns. And because they have financial plans, they have set reasons for the money they earn — there is a definitive goal to drive towards. They can create more consistent investment rules and put the pedal on the floor for growth.
Yet, the typical investor simply doesn’t think about their money that often. Unless it's their job, like mine. Mostly, they manage their money well, but it’s just another thing in their life. Other areas of life are more important and money funds those activities.
Are there wildly successful investment strategies that only buy tickers – yes. However, the people who do this well are traders not investors.
Investors are placing their money in good companies or good positions for the long-term. They know the companies they are buying and why they are buying them.
Warren Buffett’s quote is their motto, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Because investors want to own good companies, that have stock prices that are going up.
Investors know money is just a tool, not what you keep score with. They know who they are or who they want to be — and, most of all, their money doesn’t define them.
Or at least, this is the ideal they strive for, right? All of us who work around money have been guilty of defining ourselves with the success or failure of our returns. I am hard on this topic because I have struggle with this – I hate to lose. And I find it easy to keep score in the market. It is an easy scoreboard. But this is a terrible, heartbreaking characteristic. The market never gives you enough and always takes more than you can spare.
Truthfully, I’ve struggle with all of a gambler’s problems. I wanted to be a successful investor so I could feel like I was somebody. But when I learned that my identity was in Christ and started to invest purposefully, my investment strategy became more clear.
I looked at my accounts – savings went into cash or short-term bonds, college plans had another strategy, and retirement accounts had a third. I no longer compared myself or even cared about the returns that I missed out on. (and I know a lot of great investors and hear their stories about returns!) Because I knew that I would reach my goals. And if I didn’t it was ok, because I had other more purposeful goals to work on in life.
Is the stock market gambling? Absolutely, it can be. But it can also be a fantastic vehicle for you to reach your financial goals, so you can reach your life goals.
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