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Investor's World

The Thin Line between Gambling and Investing

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For some gambling is a pass time but to others it’s a way of life and a means to make a fortune. It is a bit uncomfortable to note that gambling and investing even though look worlds apart have a lot in common even though they occupy opposite ends of a spectrum. Let us start by looking at a few dictionary definitions of what the two terms mean.

Dictionary.com has three definitions for gambling but the one that is very relevant to the discussion is “to stake or risk money, or anything of value on the outcome of something involving chance”.

Britannica. com has an even longer definition of gambling: Betting or staking of something of value with consciousness of risk and hope of gain, on the outcome of a game, a contest or an uncertain event whose result may be determined by chance or accident or have an unexpected result by reason of the bettor’s miscalculation”.

The words that jump at you when you read the two definitions are chance and risk and anybody who has come into contact with gambling will agree to the fact that there is a lot of risk and the whole outcome depends on chance.

Investing is a straight forward term to define, but it branches into at least three basic definition depending on the context: general, economic or financial. Investopedia.com does a wonderful job of simplifying all the three contexts. The general definition for investing is “purchase of an item or asset with the hope that it will generate income or will appreciate in the future”.

The economists insist investing is the purchase of goods that are not consumed today but used in future to create wealth. The financial definition of investing that suits the comparison between gambling and investing is to look at investing as the purchase of a monetary asset with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.

Thus in simple terms, investing is for the purchase of an asset with the idea (I am tempted to say “hope”) it will provide income or be higher in value in future. There is however the uncertainty that the investment might not provide the expected income and the value of the investment might not increase or even fall in future. An example might bring the picture hope.

Let us take the example of a man working the slot machines in a casino, who is aware of the fact that he can hit the jackpot or lose all his money. The odds are not in his favor but he is still willing to take the risk.

The teenager at SafariBet betting on a Manchester United match also thinks the same way but for him there is a false confidence that he can accurately predict the outcome of the match. Contrast this picture with someone who invests in the stock market with the same misguided notion he can predict the performance of the stocks on the market.

The investor’s issue is a bit different from the SafariBet teenager because seasoned investors will tell you that the performance of the market can be predicted by assessing the fundamental strength of the companies and be able to point out which of the company’s will outperform going forward. We have all witnessed both bad market performance and extremely good ones and the market has seen companies with strong fundamentals perform poorly.

Investors, and especially investors in stocks, should be aware that there is always a chance that the stock you invest in will not behave as you expect to it. Which means that there is an inherent risk in investing and at the end of the day there is a chance the investment will not go as plan.

That is what defines gambling but in gambling the odds are stacked heavily against the gambler. I know! I can hear the argument already, that we cannot compare investing to gambling but when you look at stock market investing and the dynamics associated with it, you are led naturally to begin to look at it wearing the lens as a gambler. Let me also add that there is a term called the random walk theory that states that stock market prices change according to a random walk and therefore stock prices cannot be predicted.

There are some truths to the random walk theory even though the theory has been challenged by practitioners and academics alike. The point, however, remains that it is very difficult to beat the stock market as a whole because trying to predict the stock market is akin to the toss of coin. The idea that unites a gambler and an investor is risk.

The gambler is prepared to take very high risk with his money in the hope of making it big even when the odds of winning are very slim. A gambler bets against the house but it is a well-known fact that the house always wins.

It is easier to tell the difference between those working the slot machines, betting on the outcome of a football match or trying to hit the jack pot in a lottery and those putting their money into investment products after assessing the risk and return dynamics of the product.

It is however very difficult to differentiate between those operating in the gray area between gambling and investing. These individuals parade themselves as investors but in actual fact are gamblers.

It is a bit tricky to differentiate between the true investor and one who is behaving like a gambler. Investment literature will tell you putting all your investment eggs into one basket is gambling. Diversification plays a very important role in reducing the risk in an investment and therefore failing to diversify your investments reduces you to a gambler.

Another group in this category are individuals who take on excessive risk with the aim of making unprecedented profit. You don’t need to go far to get examples of these people. The recent microfinance crisis in Ghana gave us insights into how these gamblers behave.

What makes the situation very precarious for them is the fact that most of them are not able to independently assess the inherent risk in an investment and therefore assume these investments are safe.

If the expected returns on an investment are very high then you should expect that the investment will be riskier than one with a lower return. It is harsh to call these people gamblers, but the level of risk and the stakes transform it into a gamble.

A third group of gamblers parading as investors is those who put their money into investments without knowing or understanding what they are getting themselves into. Most gamblers have a fair idea of the odds against them even though they may not have adequate knowledge about the statistics involve. The investment sector in Ghana has a lot of such people with little or no knowledge about the investment environment.

They are the group that disrupts the performance of most markets. You cannot tell the story of gambling and investing without mentioning the speculators. Speculators are considered as investors but some but to win speculators need to gamble.

Gordon Geko in the movie Wall Street said “Speculation is the mother of all evils”. Speculators have been demonized in the past but history has showed that they are a necessary evil for the markets. Speculators were implicated in the recent significant depreciation of the Ghanaian cedi.

Speculators sometimes take on excessive risk to the point that it becomes very difficult to differentiate them from gamblers.

Gambling has been with humanity for a long time and it is huge industry that contribute a lot to some economies. Individuals gamble for various reasons and begrudging anyone who gambles will not achieve much.

There are gambling addicts, people who gamble for fun and those who undertake it as profession. The only problem is with gamblers who parade themselves as investors. To be a true investor far removed from gambling, the individual needs to reduce the level of the two elements that separate investors from gamblers: risk and chance.

As has been mentioned, gamblers take very high risk with a very high chance of losing their money. To reduce the risk of investing and increase your chances of success, the investor needs to diversify your investments to reduce risk, understand the interplay between risk and reward and have a clear knowledge about any investment undertaken. Diversification is a very easy concept to understand.

It is not a good idea to put all your eggs into one basket. The best is to put funds into investments that do not behave in like manner. Low correlated investments will ensure that a bad performing investment will be supported by a good performing one. Care must be taken when diversifying a portfolio because over-diversification will have the opposite effect of reducing returns.

It has been said time again that risk and return go together but many investors do not consider this when making investment decisions. Returns from investments do not appear out of the blue but are possible only after risks are taken.

Any investment that promises very high return is invariably taking a correspondingly high risk no matter what you are told. This point cannot be stressed more.

Let me echo the point for emphasis: risk begets return and anything else comes from the devil. The last safeguard to avoid gambling your funds away to understand any investment product you are getting yourself into. If not for anything at all it pays to have a clear idea about how the investment will make money for you otherwise your fingers will be burnt.

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Investor's World

Champagne Taste on a Beer Salary

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Technology has ushered us into a world of spending where we never seem to satisfy our needs. Companies have become so good at product design and marketing that it has become very easy to spend more than you have than in the past. Even though there is a psychological side to shopping, access to credit and our natural human tendency to belong has resulted in consumers living way beyond their means. Saving and investing have become taboo words that are seldom used in conversations now and idea of investing and having financial freedom later in life has become more like a pipe dream for most people.

In the past living beyond your means was an attribute that people felt embarrassed about and had a notion of irresponsibility attached to it. Currently it has become a way of life that we feel proud of because our societies have become so superficial that outward appearance is what everybody will judge you by. Gone are the days when graduates were advised to finds jobs, save and then try to build a life for the future. It is so amazing to find even students who are not working craving for the same material things that their working adult counterparts want.

It is very difficult to pinpoint when we moved from a modest society into one where spending has become a part of our culture. It is safe to say that the need to spend came with the technological advancement that followed the internet age and the insatiable need to be up-to-date with gadgets and the toys as they are released. The things competing for our money have become so much that you will be lucky to still have some funds lying around at the end of the month. Nowhere is this spending craze apparent as when we look at mobile phones.

Mobile phones are personal items and anybody who owns more than one can give you a good reason why they need more than one phone. I will rest my case about owning more than one phone debate before I alienate any of the multiple phone owners from the clique. At least everyone should enjoy the champagne on their little beer salary from time to time but you will enter into financial ruin when you overdo it.

Marketing companies and advertisers are exploiting our emotional dispositions to get us to spend more even when we do not have the means to do so. Advertisers are using very subtle advertising to spark an interest and force the consumer to take a second look at the offering. Sometimes advertisers tap into the emotional needs of consumers instead of focusing on the rational, thus creating a need that becomes so strong that it overrides the rational part of the brain and lead to making impulse purchases. There is also a herd mentality at play here and nobody wants to be left out when everybody is on the spending train.

Advertisements have become targeted and the means of reaching the consumer have increased so much that no one can escape the onslaught. Our phones have not been spared in pushing products to consumers and it appears adverts on mobile devices will lead the drive to bombard us with audio-visual content to influence us one way or the other to buy something. To clarify, when I mention spending I am not referring to the shopaholics, a phenomenon which has been rightly classified as an addiction and must be treated.

Reliance on artificial intelligence and big data analytics have provided tools for companies to be able to predict consumer behaviours and identify very effective ways of selling products to them. I am sure the Cambridge Analytica scandal is still fresh in our minds and it gives us a little preview of the effectiveness of the arsenal that will be at the disposal of consumer companies. The internet and social media platforms are littered with our personal data which can easily be used to tailor products that will appeal to us. We all want to save to be able to invest for the future but as things stand now technology is making it an uphill battle that we will need to fight with all the ammunitions at our disposal.

What is also fueling the uncontrolled spending amongst consumers is the ready availability of credit. All you need is a regular salary to get a loan from a financial institution and consumers don’t even worry about the high interest rates charged for these facilities. What compounds the problem is the attitude consumers have towards borrowing. It is strange but true that most borrowers see the money they borrow as someone else’s money and therefore it can be spent anyhow they want to. This one is champagne taste on someone else’s salary. How sweet!

The advertisers will not stop using whatever means they can find to make sure their products appeal to us and credit facilities will definitely grow and so the only factor that we can easily change is our spending habits. How can that be done? It turns out what we need is to have a beer taste on a champagne salary the opposite of what the title of the article says. The taste you have in the mouth when you taste beer for the first time. Mr. Charles Jaffe however puts it in a very simple quote for us.

It is not your salary that makes you rich, it’s your spending habits – Charles Jaffe

Let me also add a word of caution here: your salary will never be enough. Even the top 10% who own 90% of the wealth, will agree to this because everybody wants more of what they have.

If we want to save money and invest to obtain financial freedom or have a comfortable retirement then we should look at how much we are spending. It doesn’t matter how much you make, if everything that comes in the form of salary goes out then you will not be able to attain financial freedom.

In my short life as an investment professional I have come to learn that only two methods are effective: direct debit or a standing order and spending only what you have. The internet is awash with a million and one advice about saving for the future and all but having a portion of your salary taken at the source or your bank to be used for saving or investing is the remedy for low level of savings among individuals.

If your bank allows direct debit or standing order to transfer money into an investment or a savings account then take advantage of the service immediately because that is the only way you can save without going through the mental agony of doing it yourself. Trust me, you will never notice or even miss the money that is taken out and it will go a long way to help you attain financial freedom.

The second most effective way is to only spend what you have. No loans, overdraft facility or credit from any source. This will require a lot of discipline given the society we live in currently with all its trappings but I can confidently say that it is one of the few ways you can help yourself to attain financial freedom.

When you are able to save some money find an investment account to put the money in so it will earn some returns. There is a plethora of investment choices to put your money in and the financial market have developed to such an extent that there are products designed for every need the consumer will have. What is most important is to open an investment account to give your money a chance to grow.

When you able to follow the two advice then you can have your money work for you whilst you worry about the other challenges in life. At the end of the day, turning the title around to read beer taste on a champagne salary is what will give you financial freedom.

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