Investing or Gambling?

You may think you are investing but could it be more like gambling? A lot of people spend more time looking for shoes or clothes to buy than researching which stock to invest in. I'm not sure why this is so, but what I will try to do is to allow you to gauge for yourself whether you are investing or gambling.

It is entirely possible that you have made some good money in the stock market. You might have made $20,000 on Stock X and $10,000 on Stock Y. But was this just luck or was it because you had intimate knowledge of a particular industry? Was it because you understood the metrics that drove the economics of the business and knew how this company was better than its competitors? Perhaps you had also read the latest annual reports and filings with the Securities Commissions, listened in on recent conference calls and analyzed the last five or ten years of financial statements? If this was the case, then you are most certainly a prudent investor. If not, I think you just got lucky. Let's say you gambled and won!
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The "due-diligence" steps outlined above are but a few of the things professional money managers do before investing in a stock. Unless you are willing to do that, you could be taking a very big risk with your hard-earned money, you are taking a gamble!

Professional investing is just too time consuming, too specialized and too complex to do successfully on a consistent basis by yourself. If you don't have time to read Annual Reports, SEC filings, latest analyst reports, analyze financial statements and… the list goes on, you could be making a big mistake in being your own investment advisor.

If you are not going to be your own investment advisor then what are the alternatives? One alternative is to listen to Warren Buffett, the second richest man in the world and probably the world's greatest investor who will tell you to simply invest in an index fund. This is a fund which owns a portfolio of investments that are weighted the same as a stock-exchange index (such as the S&P 500) in order to mirror its performance. This effectively means that your returns will be similar to the overall stock market. Remember, a majority of mutual funds, which are managed by full-time professional investment managers, fail to consistently beat broad indexes such as the S&P 500.
Tip! Lottery requires buying a ticket in hopes of making big money. Addiction can be detected among people by one or a combination of these: preoccupation, increased tolerance towards gambling, withdrawal, escape from the world outside, chasing losses, compulsive lying, loss of control, illegal acts, risking most significant relationships, and finally bailout.

If you are serious about your hard earned money and seek consistent returns on it, then a little bit of legwork is in order. Go back to your investment statements and figure out how much you have invested, over what period of time and how much you have earned or lost over the same time period. This information will allow you to calculate the rate of return you have earned. You could then compare it to the overall market return of an Index such as the DOW or the S&P 500 and see if you have out-performed the market or not. Be a savvy investor - figure out what rates of return you have been earning on your investments and then take appropriate action.
Tip! Future articles will address the compulsive gambler, gambling addiction and a search to find a solution to this growing problem.

Fauzi Zamir is a chartered accountant and founder of Solutionera Inc. which has developed a web-site that allows investors to easily track, calculate and compare their ROIs against market indexes without having to do the complex mathematical calculations. You can visit the site at whatismyroi.com.