Investing & Gambling: Why Investing Is Never Like Gambling?

December 13, 2018 | Investopaper

I have been trading in Nepalese stock market for three years. What makes me feel annoyed sometimes is that I often keep on overhearing from other stock traders as well as outsiders that investing in stocks is like gambling. I have stayed mum and never tried to correct them. For a sensible investor, it is an inappropriate remark. When people start losing money after the market falls severely, they often compare stock trading to gambling. Losing their patience to the market slump, nervous and discouraged investors of Nepalese share market are passing similar comments.

During bullish market, share trading was the best choice for making money to the investors but their perception towards the market drastically changed along with Nepse falling to record low of 1118.13 since reaching peak value recorded as 1881.45 

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Let me explain the overall scenario of our market. As Nepse reached its record high at 1881.45 points in 2016, there were many new debutants(as share investors) in Nepalese share market who picked stocks randomly at a high price. There were encouraging news headlines like “housewives are also attracted to investing in shares and are able to earn a decent amount of profit by trading in their free time”. The market was gaining positive momentum and the confidence that every stock will perform well was driving the market sentiments. Many newcomers earned profits during bullish market and that made them invest even more with the greed of making more money.

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And then there was a twist in the tale. The market started behaving differently and people started losing money on their investments. Slowly and gradually, the scenario changed completely and Nepse plunged from record high to record low at 1118.13 points since reaching the peak value. It was a major market crash as Nepse fell by around 40% in two and a half years. Those investors who were overconfident about the stock market and choice of their stocks have now concluded that share market is nothing but a place to gamble.

“If you make careless investment decision depending entirely on a probability that if the market increases my stock price also increases then definitely it is like gambling. Unlike gambling, investing decisions must be knowledge driven.”

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So basically what I want to explain to the beginners or those who are willing to enter the market in the future is that sensible investing is very important. What I mean by sensible investing is that, before you pick your stocks, you should perform fundamental analysis of the company which includes going through important financial ratios like debt/equity ratio, earning per share, price-earnings ratio, net worth per share etc. In addition, technical aspects such as 52 weeks high low, price-volume analysis, moving average can be analyzed to predict market trends before investing.

 “When the market was on a bullish trend, it was also expected that the bear market would follow but no one predicted that it would be too soon. We can also argue that low GDP growth rate, increase in interest rate, political turmoil and lack of good monetary policies etc. are the reasons for the current bear market.”

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The risk-return approach in stock trading might make it look similar to gambling but the future is not totally uncertain in stock trading like gambling. Gambling is a zero-sum game where one wins while other loses. But in investing, somebody doesn’t have to lose for you to make a profit.  You, as an investor, might feel like your fate depends on the market price of the stock you invested your money on. This is not the case if you have an understanding of the market. If the market value of the stock declines, your net worth may decrease temporarily. But you will have the choice to stick to your investments and wait for the future. And you should know that you did not bet on the market price of the stock. You invested your money in the company behind that stock.

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The company has real assets and real earnings and it has the possibility to increase in value over time. With the rise in the company’s stature and its value, the stock price will follow along and you will be rewarded for your investments even if it may take a long time. If you study the company and do your homework well before purchasing any stocks, there may be some temporary setbacks in your investing career but you will fare well in the long term.

“Nepal Investment Bank (NIB) and Nepal Telecom Corporation (NTC) having strong fundamentals demonstrated consistency in this bull-bear period. NIB, as a leading commercial bank has been paying good dividends (40% and more in the last three years). During the observation period, the market capitalization of the company declined by 16% since July 2016. Similarly, NTC stocks were choices of numerous in the portfolio during this period. In the declining market, the net worth of NTC investors instead increased by 13%. These stocks have shown some resistance to this severe market crash where Nepse declined in an excess of 40 percent.”

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So the thing to do is to invest in companies with good financial prospects and stay updated to the market. They will definitely pay you good dividends and also increase in value over time. Since the behavior of market is not in your control and can’t be predicted with certainty, having good companies in your portfolio can make you less nervous and be patient even if the market doesn’t go your way. Once the market regains the bullish trend, your portfolio will definitely provide good returns and you will be rewarded for your patience. Never ever judge the share market as a place for gambling and make your investment decision totally based on probability. The market can never be predicted with full certainty either it goes the bull or the bear way.

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One thought on “Investing & Gambling: Why Investing Is Never Like Gambling?

  • December 13, 2018 at 5:08 am
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    Very helpful article for all investors who engaged on share market. Aware them by –
    “If you make careless investment decision depending entirely on a probability that if market increases my stock price also increases then definitely it is like gambling.”

    Reply

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