When Investing Is Not Investing

Do you buy lottery tickets? They are not investments, are they? They fall into a category called events. The payback depends on the event. The right numbers come up. Considering only the main prize, the odds of getting a return on your investment are either zero or 100%. Zero being many times more probable

Is the stock market like a lottery?

It depends on who you talk too and how they think about investing. If they are like Warren Buffett and many others, it is not. Their idea of the market is more process and ideally no events other than the one that purchases their position. They don’t “buy stock” exactly, they buy a business. Businesses are all about process.

Other buy stock with the idea it’s price will rise. Sometimes dramatically. Many don’t even know what their stock does. IS KLM an airline or a gold mine in Australia? Doesn’t matter. The chart says it is ready for an upside breakout.

Still others are momentum based. The bus theory. If you see something moving, you get on. When it stops, you get off. Pretty easy really. Too bad the stops aren’t shown on a map.

You will notice that both buying stocks because they will go up and buying stocks that are moving both require events to work. So more like a lottery.

We call this type of buyer a trader. Not an investor because the process is not the same.

The contexts

Investing

When you buy a business you can assess its financing, its competitive position, its ability to innovate, its management, its cash flow, and the nature of the market it involves itself in. You can estimate the future and make decisions about value using simple ideas like discounted cash flow. Very rational. Plus it provides the opportunity to use the long run to your advantage.

Businesses are fairly predictable over time and you can change your mind.

Trading.

Trading is more more about the market than the business. It is about being more adept at two sided decisions. When to buy and for how much, and when to sell. Time is serious factor in trading.

When you are trading you are betting you can process information better and faster than others in the market. As Keynes said, “Successful investing is anticipating the anticipations of others.”  He really meant trading though. There is no process to the underlying business only the process of competing with others who might want to pay more for a given stock.

Now I don’t know about you, but I am pretty sure a business is less complex to think about when compared to the possible actions of a few million other traders.

You may have seen the run up in GameStop stock several weeks ago. Did you see any discussion about its business fundamentals. A little to be sure, but most of it revolved around the story of the little guys  eating the hedge funds’ lunch and how the SEC was impotent. Personal competition. The Reddit sub group wallstreetsbets has about 10 times as many subscribers now as it did 6 months ago.

Competitive games draw players and crowds. Even if the players don’t know the rules or the dimensions of the playing field. You can be sure professionals are working on tactics that will spoof the uninitiated and take their money. Experience is expensive. The people playing on this field just now should think lottery not investment.  I suppose they could anticipate what the pros will do and devise ways to capture their money. Pretty sophisticated though, so not many can do it.

What it means

Everyone like a windfall profit. Windfall losses are less desirable and many times more common. Trading leads to windfalls of both kinds. Like lotteries.

Investing is about process and one of the factors is what rate of return do you need to get the result you want. The investment selection process can then become a process and processes tend to be more predictable. Not much fun though.

What’s worth more to you, the excitement or the outcome? If you don’t know the difference, you are buying risk. You should step back and think it through.

For a more complete examination take a look at this. Finance as Culture.


I help people have more income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com 

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