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Friday’s Financial Update 8-18-2017: Investing vs. Gambling

We’ve all seen the news headlines this week of political drama in many forms.  The market has been up and down depending on the news of the day.  Despite these events, a diversified long-term focused investment plan is still the way to go to weather not only the news but also the market.

Thought that this might be a good chance to look at another topic: investing vs. gambling

I have heard it said by numerous people over the years that investing is just like gambling.  When I’ve heard this, I believe they simply meant that “it can be hard to understand” or “it’s risky” or even “ it just seems like a game of chance.”  Although they maybe didn’t truly believe it is gambling, that is the closest thing they could relate it to.  However, I believe that there are many differences and comparing the two is just not accurate.

To start off, let’s better understand the definitions of each word:

By reading the definitions alone, it’s clear they are not the same thing.

The Outcome:

When choosing to gamble, you are choosing from a variety of “games” or “ways” to risk money for a return.  We can all agree that whether you play the slots or a card game, you have no way of knowing the outcome.  You’re hoping for a good outcome, good luck or a favorable hand.

When you invest, you are buying a company’s stock with the expectation that the earnings and profits will be strong, positively impacting the stock price.  Now on a very basic level, if you know nothing about a company’s stock or expected future performance, you could think this is like gambling, hoping for a good outcome.  However, you do know something about a company.  Let’s take a company like Amazon as an example.  If you know nothing about Amazon’s financial statements, you can look around and see that you and many other people use Amazon more and more for convenience as a distributor of goods.  If you believe that more and more people will be using Amazon’s services for years to come, you could invest by purchasing this stock with the belief this company will continue to do well.  This example could be true for Apple, Google, Tesla or any company that offers products or services.

What is investing?

To simply choose a company that appears to sell a lot of products can leave you with poor investment outcomes.  Not only do you need to understand a company’s revenue but you need to understand how much of their revenue they keep, which is their profit.  By keeping their expenses in check by being more efficient with people and technology, companies can then continue to increase profitability.

There are many different reasons you may choose to invest in a particular company:

  • You believe in their values, mission or vision
  • You like their product
  • You believe it’s a good season for the product or service being offered
  • The business has been around for many years weathering a variety of economic circumstances
  • You feel the economic or political conditions will be favorable for the company

Although past performance is not always reflective of future results, looking back and reviewing the historical information available on each company is a great way to gain context.  What might I expect going forward?  How has management handled this situation in the past?  Do I expect the same or similar results again?  If so, would this continue to be a good investment?

There are a variety of methods for how to invest.  You can buy the stock of one company and invest in that one only.  Or you can buy a mutual fund or ETF (exchange traded fund).  These are “baskets” or “collections” of stocks.  For example, you could just buy an ETF with healthcare company stocks.  Or you could buy a mutual fund with all large company stocks like Procter and Gamble, Disney, Apple, Boeing, Johnson and Johnson, Wal Mart, Exxon Mobil, etc.  There are many ways you can invest in a variety of companies.

The likelihood of a good outcome is dependent on the companies you choose to invest in.  There are MANY other factors you would want to look at before choosing what to invest in.  At a very basic level, though, you can see the difference between investing and gambling.

If you have not yet started investing because you didn’t understand what it is or thought it was a risky bet, please reach out so we can help get you started.  Like many first time decisions, it takes someone to explain what you don’t know and answer questions to overcome your fears.

We are happy to help, educate and explain along the way!