Gambling, speculating, investing — Three categories of investors and knowing where you stand
In stock investing, some are after the quick buck and hope that stock XYZ is going to go through the roof by tomorrow. Others simply follow their hunch and hope for short-term profits. Yet others invest for the long-run and pay attention to things like dividends.
In my experience, investors can be divided into three separate groups. They come to the market with different expectations, jump based on a different kind of analysis on different opportunities and expect different kinds of returns.
Metaphorically, category 1 goes to the casino and bets on whatever they believe might work, category 2 speculates on a spectacular rise or fall of certain stocks, and finally category 3 invests for the long-run and expects only long-term returns. It is important to know where you stand to inform your investment decisions and, quite frankly, to know if what I am writing here is relevant to you at all. Disclaimer, I am category 3 myself. So if you were hoping to learn about day trading for instance, then I am not your best source of inspiration. If you want to create a stock portfolio which is going to enable you to enjoy a certain degree of financial freedom, then we are on the same page.
Category 1 — Gamblers
You may not realise it, but you may very well be in this category. Often when friends talk to me about investing in stocks, they are hoping for the quick buck and typically don’t overdo it on the research part. What that boils down to is gambling. Similar to betting on red versus black in a game of roulette, they are betting on BMW versus Daimler, Alphabet versus Facebook, Amazon versus the rest of the world. I am not saying that this is wrong per se, if your results work for you, keep at it. But more often than not those bets don’t work in the long-run.
- Gambler may enjoy a winning streak in a bull market and as soon as the tide turns, they get wiped out
- They may have an insider knowledge on a certain industry, for instance because they work in it, but this provides only so and so many trading opportunities. Soon as they venture away from their home-turf, they get wiped out