Tuesday, 31 January 2017

CNY Topic: Gambling vs Investing

Happy Chinese New Year all! It has been a fruitful rooster year so far, visiting relatives, gambling and stuffing myself with CNY goodies. Besides eating, I believe most of us enjoy some gambling (it is actually a great activity, if not done excessively) with our relatives. 

As a matter of fact, when I share with some of my relatives that I dabble with the stock market, some of them tried to advise me against it. "Eh, don't put your money in the stock market, might as well go gambling". Some of them liken investing to gambling as they have heard so many horror stories of people losing a majority of their wealth to the market. Furthermore, they have either lost money themselves in the market or they are clueless of how the market works. So, what is the difference between gambling and investing?

The main difference between gambling and investing is that you acted on calculated risks with information you received. In the stock market, there are many uncertainties just like in a game of Black Jack. However, a stock wins by its earnings and growth potential. Unlike the next card in Black Jack (which cannot be seen or predicted), these earnings and growth potential are often released to the public through annual reports and financial statements. By analyzing the management team, the strategies of the company, the financial figures and its business model, it is clear some companies will make it while some will not. 

Assume you are playing Black Jack (I am guessing everyone knows the rule of Black Jack, so I won't explain further), and you receive 16 points for your first two cards. You do not know what is the next card, but you decide to draw anyway. This is gambling whether you win or lose. 

However, what if you can see through the deck or predict the next card? Perhaps you have x-ray glasses that could tell you the next card with 50% probability. The next card seems like a 5, but it turns to be 6. You lost money but this is investing.

In reality, we are often unable to be 100% sure if an investment will make money for us. We can only make sense of the information available to us and try to do our best. A blue chip stock can quickly face liquidity crunch and lose 70% of its market value in a year (e.g. Noble Group). Both StarHub and M1 lost at least 30% of its market value in 6 months due to emergence of 4th Telco (from Jun 2016). However, if we are sure that the business is fundamentally sound, and that it will continue generating returns for its shareholders, then it will be worth taking calculated risks to invest our money in them for the longer term.

If you are taking a gambling approach to investing (i.e. not doing your due diligence before your purchases), don't forget that the house always win.

Best,
AT 



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Financial freedom = Passive Income > Expenses. Always remember that there are two sides to the equation of financial freedom. Beside working on how to improve our passive income through investing, we should never neglect the expenses portion. By striving to improve both side of the equation, we can achieve our financial goals and win in the game of money.

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