Overcoming financial anxiety – Mental Health Awareness Week
This week (13-19 May 2019) is Mental Health Awareness Week. While body image is this year’s...
I’m relatively new to the world of finance. But when I try to talk about my new(ish) job with my millennial friends, I’m often stopped in my track by the phrase ‘Investing is just like gambling, isn’t it?’.
This reaction is perhaps unsurprising, when I think that most people will only have come across the world of investing when watching films like ‘The Wolf of Wall Street’, ‘Rogue Trader’ and ‘The Wizard of Lies’.
So how do we debunk the myth that investing is just like gambling?
Quite simply, I think. After all, the basic differences are clear: when you are gambling the odds are against you. When you are investing, the odds (and time) are actually in your favour.
‘Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.’ – Paul Samuelson, the ‘Father of Modern Economics’
Gambling is a zero-sum game meaning you make your money from other gamblers, hence the phrase ‘the house always wins.’ That’s because casinos are a business and, at the end of the day they too need to make a profit. They make their profit by stacking the odds against the individual. So while entertaining, it’s still a game of chance.
Investing is stacked more in your favour because you can decide which company (maybe even a casino) or fund you think has the best prospects and invest in it for a period of time. That way you can get a share of those profits that are making. By researching before you invest you are not relying on luck as you do when you gamble, but on your own – or someone else’s – judgement.
It is true that both gambling and investing come with an element of risk. In both scenarios you can lose all your money. However, if you diversify your investments across a number of companies – either yourself of via an investment fund – it is unlikely that you will be left with a big fat zero. Even if one company does badly, another may do well.
Investing is also playing the long game. While the movies may focus on the hustle and bustle of trading floor, where young men and women are constantly buying and selling stocks in rapid succession, our type of investing can be quite different. Some of the fund managers we rate very highly will buy and hold a stake in a company for three to five years.
And, depending on your own attitude to risk, you may even feel that some investments are less of a ‘gamble’ than others. For example, investing in a US government bond would be seen as less risky than investing in the shares of an emerging market company.
Investing doesn’t mean throwing your money into a hat and hoping to magically pull out more than you put in. It’s not betting on black or trying to count the cards. It’s putting your faith in a company: that it will grow and prosper over time. And you can further stack the odds in your favour by diversifying your investments.
Has all this talk of investing and gambling made you want to watch a stock market film? Jonathan Gumpel, who runs the Brooks MacDonald Defensive Capital fund, recommends ‘The Big Short’ as “a very good film which features the actress Margot Robbie explaining difficult finance terms from a bubble bath” – or you could read the investment dictionary for millennials from your own bubble bath – I won’t judge.