A short quiz:
What is the difference between investing, speculating and gambling?
Ans:
In investing, the probability of winning is >90%
In speculating, the probability of winning is 50%. You lose when brokerage fees are factored in.
In gambling, losing probability is >95%
Definition of investing:
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.
As in most countries, those people who call themselves “investors” are not investors at all. They are speculators. In the short run, particularly while capital markets are rapidly developing, speculators may be able to earn high returns by rapidly trading stocks without doing thorough analysis. But in the long run, you cannot earn sustainably high returns from mere “gut feelings.”
People like to speculate because they become addicted to their own belief that they are about to make money. And when they do make some money, they turn greedy as their actions have been justified by a positive result. In terms of brain chemistry, the anticipation of profits activates the dopamine system in the brain, flooding our neurons with a signal of excitement.
Greed is generated in the same regions of the brain that produce pleasure when we find food or shelter or love. These basic reward circuits are among the oldest systems in the human brain.
Geniuses have them, too. Brilliant people are better at generating great ideas than the rest, but they are no better at controlling their own emotions than you or I.
Luck has a great deal to do with it. Whenever a stock trades, the buyer thinks the seller is making a mistake. The seller thinks the buyer is mistaken. Only one of them can be right. After they both pay their dealing costs and any taxes on the transaction, neither may show any net profit for his pains. In the short run, almost anyone can be right a few times in a row, by luck alone. Even in the long run, luck can rule the day. It can take years, even decades, to determine whether an investor has genuine and repeatable skill or is just lucky. The danger comes when you believe you are skillful and, in fact, you turn out to be merely lucky.
If one do not put policies and procedures in place, in advance, to control one's emotions, one will never be able to resist the siren song of the markets when the markets go mad. Common sense and good judgment are vastly more valuable than intelligence.
What is the difference between investing, speculating and gambling?
Ans:
In investing, the probability of winning is >90%
In speculating, the probability of winning is 50%. You lose when brokerage fees are factored in.
In gambling, losing probability is >95%
Definition of investing:
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.
As in most countries, those people who call themselves “investors” are not investors at all. They are speculators. In the short run, particularly while capital markets are rapidly developing, speculators may be able to earn high returns by rapidly trading stocks without doing thorough analysis. But in the long run, you cannot earn sustainably high returns from mere “gut feelings.”
People like to speculate because they become addicted to their own belief that they are about to make money. And when they do make some money, they turn greedy as their actions have been justified by a positive result. In terms of brain chemistry, the anticipation of profits activates the dopamine system in the brain, flooding our neurons with a signal of excitement.
Greed is generated in the same regions of the brain that produce pleasure when we find food or shelter or love. These basic reward circuits are among the oldest systems in the human brain.
Geniuses have them, too. Brilliant people are better at generating great ideas than the rest, but they are no better at controlling their own emotions than you or I.
Luck has a great deal to do with it. Whenever a stock trades, the buyer thinks the seller is making a mistake. The seller thinks the buyer is mistaken. Only one of them can be right. After they both pay their dealing costs and any taxes on the transaction, neither may show any net profit for his pains. In the short run, almost anyone can be right a few times in a row, by luck alone. Even in the long run, luck can rule the day. It can take years, even decades, to determine whether an investor has genuine and repeatable skill or is just lucky. The danger comes when you believe you are skillful and, in fact, you turn out to be merely lucky.
If one do not put policies and procedures in place, in advance, to control one's emotions, one will never be able to resist the siren song of the markets when the markets go mad. Common sense and good judgment are vastly more valuable than intelligence.
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