My Family's Investing Advice... And Why I've Ignored It

Published in Investing on 2 April 2012

Is investing really just gambling?

Many years ago, when I was a mere twinkle in my parents' eyes, my grandfather gave my father some very simple and sage advice: don't drink, don't gamble, and don't chase women. My father then passed this advice down to me.

Now, apart from the occasional tipple, I hardly drink. Frankly, I don't have the energy to chase after women. And, of course, I don't gamble. Or do I?

Well, recently my father has said that I have been going against one of these rules. Because he tells me that investing is just a form of gambling.

The case against shares

I must admit, there is some truth in what he says. There is clearly a strong element of luck involved. Stock markets, and the shares listed on them, because of their openly traded nature, will fluctuate. And sometimes the fluctuations can be wild.

Shares are at the mercy of rumour and conjecture. A profit warning or other piece of bad news can send the share price tumbling. Unless you have powers of clairvoyance, you can't be 100% sure that a share will do well.

I would agree that investing done in a reckless fashion really is no better than gambling. Say you listened to random tips. Say you didn't bother to diversify your investments. Say you took other people's advice for the gospel truth and didn't do your own research.

Say you traded too much, causing trading costs to eat into your returns, and that your trades were at the mercy of your emotions, leading you to buy high and sell low.

Say you took no notice of valuation, buying shares which were the flavour of the month, despite their unjustifiably high prices.

When you think about it, there are actually so many ways to lose money in the stock market! For the uninitiated, for those who know little about the risks but plough on anyway, investing really is just gambling. To that extent, my father is right.

The case for shares

But say you proceed with great caution. Say you pick your shares with great care and invest in a blend of strong, high-yielding blue chips. Say you invest in funds with a proven track record. Say you invest a substantial amount in trackers with minimal fees, ensuring that you at least match the market.

Say you research your investments carefully, taking heed of information from sources such as The Motley Fool, but also throwing in a healthy dose of scepticism.

Say you diversify your holdings so that you don't have all your eggs in one basket. Say you are patient and bide your time to make your purchases. Say you ensure, above all else, that you leave a clear margin of safety, buying into shares and markets which are undeniably cheap but have great prospects.

Suddenly you are stacking the odds in your favour. Suddenly, investing no longer looks like gambling, but looks planned, considered and deliberate.

Of course, this is investment as it should be. But to develop a method of investing that works and that, importantly, suits you, takes time. Everyone, including the experts, makes mistakes. The key thing is that you learn from your mistakes, and don't keep repeating them.

It's not what you do, it's the way that you do it

So, is investing gambling? The thing is, as regular readers of the Fool will know, there are a million ways to invest.

If you are reckless then investing is the worst type of gambling there can be. If you are careful and intelligent then investing is not gambling, but is an integral part of long-term financial planning. In fact, the greatest gamble is to put all your money in a savings account, earning a miniscule rate of interest and being steadily eroded by inflation.

That's why I have not taken my Dad's advice and have continued to invest in shares. And why my advice to my son will be a little different: don't drink, don't gamble, don't chase women. But do make a cautiously assembled portfolio of shares an integral part of your long-term financial future.

And -- who knows? -- that might just be the best piece of advice I ever give him.

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Comments

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Hannibalis 02 Apr 2012 , 9:45am

There is a problem, of course, and that is that most shares lose value over time - some US analysis shows up to 75%!

http://www.the-diy-income-investor.com/2011/09/75-of-us-shares-lose-value.html

So it is prudent not to limit your investments to shares only - fixed-interest securities such as corporate bonds, pibs, prefs have performed better recently than shares - and will probably continue to do so.

F958B 02 Apr 2012 , 11:43am

Stockmarkets are not particularly a gamble, nor is there more than a modest amount of "luck", if the sums have been done properly before making a purchase.

If the stockmarket is viewed as a place where investors can buy businesses, it is not a gamble.
You are buying a piece of a business. Look at investments as if they were an addition to your existing business.

A true investor buys a business at a sensible price, for the long term, with the intention of enjoying its cashflows. Of course, if a fool comes along and offers a high price for a business interest, it can make sense to let them take it.

Unfortunately, most "investors" are really speculators, which is not far from a gambler. They buy something with the hope of selling it on to a bigger fool at a higher price.

If you would be prepared to borrow money to buy an asset (with interest to pay on the borrowings), then it is probably an investment as you will have done your sums "for the long term".

If you hope to make a quick profit on something, not caring about the price you are paying for the underlying business, then it is probably a speculative gamble.

.

Buffett's numerous comments over the years cover a lot of the above and are well worth reading.

There are only a few business truly worth investing in "for the long term"; probably only one in three of the companies in the FTSE being genuinely good businesses, with only a handful available at a sensible price at any time.
The rest are for speculators; often fast-moving, often cheap, but lacking quality.

F958B 02 Apr 2012 , 12:08pm

Some quality companies?

How about Unilever?
They could be purchased for £10 per share in 2004.
For that £10, an investor would have received 40p dividend the prior year and 42.56p in the rolling 12-month period after purchase. Relatively quite attractive, compared to the FTSE of the time.
ULVR had a 4.0% historic yield and 4.26% expected forward yield, with the dividend payout having a long and distinguished history; twice that of the 1997 payout.

Now?
Last year's dividend was 77.6p (for a yield of 7.76% on the original £10 purchase price in 2004) and is expected to be 80p for the rolling year ahead.

The share price has also been dragged up, more or less in-line with the progressive and dependable dividend.
Dividend from 40p to 80p.
Shares from £10 to £20.

Ah, but what about GSK and VOD? I hear people ask.

They have, indeed, delivered similar "progressive" dividend policies, but the shares began the early-2000's at extremely overvalued levels, which, as almost always happens to overpriced shares (or underpriced), reverted back to - and below - the mean.

So the difference in share price performance was that ULVR were sensibly valued in 2003-4, while GSK and VOD in the early 2000's were ridiculously priced and trending back to their mean valuations.

I quote Buffett:

"If you aren't prepared to own a business for ten years, don't own it for ten minutes"

"In the short term the market is a voting machine, but in the long term it is a weiging machine"

"It is better to buy a good company at a fair price than a fair company at a good price"

"Buy companies which can be run by idiots, because sooner or later, they will"

goodlifer 02 Apr 2012 , 11:11pm

"In the short term the market is a voting machine, but in the long term it is a weighing machine"

Actually I think this one's from Great Uncle Ben Graham.

goodlifer 02 Apr 2012 , 11:57pm

"Is investing really just gambling?"
Not necessarily, though it can be.

Bridge, poker, blackjack, horse racing, the stock market etc are gambles for perhaps most of us, but not for the professionals.

"Professional" doesn't necessarily mean you put it on your tax return.
It just means you win consistently without cheating

Professionals operate in all the above activities, and quite a few more.
As far as i know there are no National Lottery professionals - apart of course from the people who run it.

vagueles 03 Apr 2012 , 1:46pm

So success is, in fact, all about doing your research and establishing some facts rather than acting on emotion? Well, in that case all the experts would reach the same conclusions wouldn't they, and we'd all be investing in the same things?

Well, no actually. It's all about the timing of the receipt of the information. You see, some of us don't live and work in London, so our main access to information is via the media - FT and Motley Fool etc. By the time we 'get on the inside track' half the world knows and those who were really in the know early on have moved on. In fact, when we invest, we're the ones who pay the slight (or great) premium which provides the pay-off for those who had the inside info (god forbid I mention insider dealing). These are, of course, the same people who go around telling us that investing isn't a gamble, because for them it isn't. These are the guys who take the 'house percentage' (and sometimes a lot more).

snoekie 03 Apr 2012 , 3:15pm

Yep, investing is a form of gambling, even from good companies, or perceived to be good.

E. G. Vodafone, Invensys,, Cookson, RSA, Lloyds, Halifax, Aviva, RBS, Motorola, even United Utilities, all of which were considered good investments. Admittedly some of these are still going, some producing dividends and some maybe with prospect.

Halifax is gone, as has Motorola but I am still dropping a small bundle on the others, some of which I have held for years, only to see them drop steadily. I have never invested in it, but some of the older fools will remember Rolls Royce, so called top notch blue chip at the time, it went bust

So yes investing is a form of gambling, but then so is house buying, at times, and depending on its state.

On the whole, with a diversified portfolio I am still, currently, up 70% odd.

When the market stabilises and some longish shots deliver and some of the above 'recover', I should be quids in. In the meantime I am enjoying a sort of semi decent income, would have been more, but for the lack thereof I have Gordon Brown and Ed Balls to thank for that lost value and income.

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