Are You Gambling With Your Portfolio?
Gambling is not often viewed as a sensible way to build wealth. After all, there are very few gamblers who can successfully do it for a living.
Socially, it’s seen more as a form of recreation than as a pathway to financial independence. Sadly, it can also be a form of addiction and destroy family finances and lives in some circumstances. That’s why gambling often comes with certain social stigmas attached.
Gambling is a very big business – especially in the U.S. According to a 2017 article in The Economist, Americans lost $116 billion from gambling in 2016.
That number was double the second-place country on the list, China. That number has undoubtedly increased since that time. Of the $116 billion, $40 billion came from the commercial casino sector, $30 billion from tribal casinos, with the online gaming and the lottery contributing the rest. That $116 billion figure only accounts for legal gambling. Illegal gambling accounts for billions more in losses.
With that much in losses, gambling rarely pays. It’s because the odds are stacked against you.
Turning now to your investing approach, ask yourself this honest question:
ARE YOU A GAMBLER OR AN INVESTOR?
Before you answer that question, let’s first look at the definition of gambling vs. investing.
According to the Random House Dictionary, here are the definitions of gambling and investing:
Gamble: “To play at any game of chance for stakes. To stake or risk money, or anything of value, on the outcome of something involving chance.”
Invest: “To put money to use, by purchase or expenditure, in something offering profitable returns.”
Gambling sounds like rolling the dice while investing sounds like planting a tree. The outcome of one is completely random while the other offers a more certain outcome if the right spot is chosen for the tree to grow along with giving it adequate nurturing and time to grow.
How can you know if you’re gambling with your portfolio or if you’re investing?
Give yourself the following assessment:
Are You More Interested in Short-Term Payoffs or Long-Term Returns?
Gamblers aren’t interested in the underlying economic fundamentals of investing because they aren’t in it for the long-term.
- They’re looking to roll the dice on a short-term investment for a big payoff.
- They don’t bother researching an opportunity or looking at the underlying economic indicators.
- They are unwilling to lock their money up for a long time because they want to be able to sell when they think the market is hot.
Investors, on the other hand, think long-term. They’re not looking for the quick payoff. They know that illiquidity will give their investments time to grow and to iron out the peaks and valleys. That’s why they’re interested in the underlying economic fundamentals and indicators. If they’re investing in cash flowing business or real estate, they’ll do extensive research on their markets, supply, demand, demographics, projections, etc.
The problem with treating your investments like gambling is that it’s difficult to time the market. You may think you’re buying in at the bottom, when in fact, you’re just at the beginning of a longer slide. This could spell disaster.
Whereas with gambling, you leave pretty much up to chance when you’re relying solely on your instincts for timing an investment, with investing, savvy investors leave very little to chance. They mitigate risks to stack the odds in their favor.
Gamblers are purely interested in appreciation – the difference between the price at what they bought an asset for and the price at what they sold it for.
Investors are interested in much more than appreciation. They’re interested in cash flow and appreciation, but not just market appreciation. They’re interested in maximizing appreciation through forced appreciation – appreciation they can manipulate through improvements and operational efficiencies.
Do You Leave Everything to Chance or Do You Try to Control the Outcome?
With gambling, there are two possible results – winning and losing. If you buy a stock or cryptocurrency, the only way the price of your holdings can go is up or down.
Gamblers sometimes feel powerless to the result of their investments. Investors, on the other hand, feel empowered. They believe in cause and effect. It’s because there are often historical data to back up their motivations and actions. They feel confident that if they spend a little money here in this part of their business, it should have this particular financial result.
Investors try to eliminate as much chance from their investment equation as they can. That’s why they’re more likely than the gambler to conduct thorough research, due diligence, and financial analysis to ensure the success of their investments.
What’s Your Mindset?
Think about your mindset when you approach an investment. Do you talk about “rolling the dice” or “feeling lucky” or “striking it rich?”
Investors are less cavalier in their approach and are more sensible. They talk more in terms of expected returns, proformas, market analysis, etc. Boring stuff to the gambler but a recipe for success for the investor.
Gambling rarely pays and the investor who remembers to think long-term focuses on cash flow as well as appreciation takes control of their investment decisions and adopts the proper mindset will take gambling and all of its risks out of the investing picture.
While gamblers look to make a quick buck on an investment with little or no research or afterthought about the market or underlying economic fundamentals, an investor will focus on cash flow, appreciation, demographics, economic indicators, and sound market research to maximize results.
Investing the right way can be a great wealth builder as long as you approach it with the mindset of an investor and not a gambler. Once you abandon the gambler inside you and embrace the investor you’ll start making better decisions and getting better results.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.