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A Thin Line Between Investing and Gambling

A Thin Line Between Investing and Gambling

Understanding the Blur between Investing and Gambling

Typically, gambling is seen as wagering on an event with an uncertain outcome, typically one which brings more losses than gains. But when you dive into the world of trading, you'll find the notion of gambling becomes rather multifaceted. Quite a number of traders unknowingly adopt gambling habits, trading in a manner or for reasons diametrically opposed to successful market operations. This article will cast light on the surreptitious ways gambling sneaks into trading activities and the triggers that could incite a person to trade or possibly gamble.

Unmasking the Covert Gambling Traits

Contrary to what they might believe, people who deny any gambling habits may, in fact, be acting on such impulses. Unearthing the root causes behind our actions can significantly reshape our decision-making process in the future.

Before digging into the inherent gambling behaviors in actual trading, one such tendency becomes evident even before any trading takes place. This trigger continues to shape traders as they accumulate experience and become frequent participants in the market.

The Influence of Social Proofing

There are those who may not inherently possess a keen interest in trading or investing in financial markets. However, due to social pressure, they find themselves venturing into trading or investment. This is particularly prevalent when hordes of people are chattering about investing in the markets, generally during the climax of a bull market. Conforming with societal norms can lead individuals to invest to avoid feeling out of place or dismissive of others' beliefs.

Trading to appease societal pressures doesn't directly qualify as gambling, provided the individual understands what they're doing. However, entering into financial transactions without a solid investment understanding equates to gambling. Such individuals lack the expertise to influence the profitability of their decisions.

Market variables are plenty, and misinformation among traders or investors paves the way for gambling. Until people acquire the knowledge necessary to beat the odds of losing, each transaction involves a degree of gambling.

Unseen Factors Fueling Gambling

Once a person embarks on their journey into the financial markets, there's a learning curve that may appear to be gambling, depending on their individual approach. How a person navigates the market will dictate whether they evolve into a successful trader or remain a chronic gambler in the financial markets.

The following two attributes, among many others, are often overlooked but feed into gambling tendencies in traders.

Time Horizon

If you notice a high turnover in your portfolio, indicating frequent buying and selling positions and continual portfolio monitoring on a daily, weekly, or even monthly basis, this may be a sign of a problem.

The issue here lies in the potential for recency bias, fear of missing out on what others are doing, and loss aversion, that is, taking greater risks to recover losses, all of which can destabilize your portfolio.

Contrarily, sound investments often require some time to bear fruit and can go against the tide of public opinion. The energy trade in mid-2021 is a prime example, and some argue that this continues to be the case in the current climate.

Zero-Sum Game and Diversification

To win, someone else has to lose. This scenario plays out frequently on social media, where the "my way or the highway" crowd prevails, such as going long on Tesla Inc. and short on oil stocks or long on tech stocks and short on traditional sectors like consumer staples.

Savvy investors don't put all their eggs in one basket. Instead, they adopt a goals-based approach that aligns with their personal financial goals and is independent of everyone else's. This approach entails owning a little bit of everything with varying weightings to maximize the likelihood of hitting their target.

Compare this with individuals who heavily invest in a single sector, region, or market, which can sometimes be inadvertent. For instance, Apple Inc., Microsoft Corp., Alphabet Inc., Inc., and Meta Platforms Inc. collectively account for 17.5% of the S&P 500, a higher tech concentration than during the 2000 tech bubble.

The Thrill of Gambling (Trading)

Even a losing trade can provide a sense of power, satisfaction, or excitement, especially when it relates to social proofing. If everyone in a person's social group is losing money in the markets, they may find consolation in sharing their loss stories.

When a person trades for thrill or social proofing, they are likely trading in a gambling style, rather than systematically and through testing. Trading can be exciting, connecting the individual to a global network of traders and investors with diverse ideas, backgrounds, and beliefs. However, getting swept up in the "concept" of trading or the emotional highs and lows often detracts from methodical and systematic action.

Trading for Victory vs. Trading a System

A methodical and systematic approach is crucial in any odds-based scenario. Trading to win might seem like the ultimate goal - after all, why trade if not to win? But hidden within this belief is a damaging flaw when it comes to trading.

Although the ultimate aim is to make money, trading to win can paradoxically steer us away from making money. Consider this scenario:

Taylor purchases a stock they believe is undervalued. The stock continues to dip, putting Taylor in a loss position. Rather than acknowledging that the stock is not merely undervalued and that other factors are at play, Taylor holds on, hoping the stock will bounce back, allowing them to win (or at least break even) on the trade. The obsession with winning forces the trader into a position where they refuse to exit bad positions, because doing so would mean admitting defeat.

Successful traders frequently take losses - they acknowledge when they are wrong and keep the damage minimal. Not having to win on every trade and accepting losses when conditions suggest it is what enables them to turn a profit over multiple trades. Holding onto losing positions after the initial entry conditions have changed or become negative implies that the trader is now gambling and no longer utilizing sound trading methods (if they ever did).

Wrapping Up

Gambling tendencies are often deeper-seated than initially thought and extend well beyond the conventional definitions. Gambling can manifest as a need for social validation, or an action to attain societal acceptance, which often results in engaging in a field with little knowledge.

Gambling in the markets is predominantly visible in those who do it for the adrenaline rush they get from the markets' excitement and activity. Lastly, relying on emotion or a winning-at-all-costs attitude to generate profits - rather than trading within a systematic and tested framework - hints that the person is gambling in the markets and is unlikely to find success over numerous trades.

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