HUGELY IMPORTANT LESSON FOR ALL MY NEWSLETTER SUBSCRIBERS:
Are you investing or gambling?
That title immediately caught my eye when I was browsing Investopedia. There are far too many people that believe they are investing, when in reality, all they are doing is gambling like they would at a casino in Vegas; throwing their money around with just a hope that things will turn out. The scary part is, they don’t even know that they are simply gambling. Listening to Jim Cramer say “Buy Buy Buy” and then buying the stock is gambling if you don’t do your own research FYI.
Gambling is defined as staking something on a contingency. The article by Cory Mitchell goes on to talk about the hidden gambling tendencies that so many traders end up using. Just as the case is for people with a gambling problem, admitting that you have the problem is the biggest hurdle. It is likely that anyone who believes they don’t have gambling tendencies will not happily admit to having them if it turns out they are in fact acting on gambling impulses. But discovering what leads us to take certain actions can create change within us, as the underlying motivators are discovered by the conscious mind.
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1. Social Proofing: some people may not even have an interest in trading or investing within the financial markets, but social pressures induce them to trade or invest anyway. You may have a friend or colleague that talks about trading a certain stock or making a 20% profit last week after company XYZ reported good earnings, and human tendency is to be jealous and want to be able to have that success as well. This is especially common when large numbers of people are talking about investing in the markets (often during the final phase of a bull market, I’ve heard stories from just before the financial crisis, where cab drivers were talking about trading stocks). People feel pressured to conform by their social circle, so they start investing to avoid any sort of disrespect or disregard for others’ beliefs and to not feel left out.
This isn’t gambling if you do research and know what you are getting yourself into before you begin trading, but entering into a financial transaction without the aforementioned solid investment understanding is gambling, regardless of what the social media portrays. This is where people lack the knowledge to exert control over the profitability of their choices. A big example of this that Tim deals with is when the scummy stock pumpers that he talks about send out their letters and people blindly follow them, thinking they’ll get rich quick. If they simply took 10 minutes to research the companies being promoted (or read the fine print in the email) they would know that the stocks aren’t worth investing in. There are many variables in the market, and misinformation or disinformation within investors or traders creates a gambling scenario. Until knowledge has been developed that allows people to overcome the odds of losing, gambling is taking place with each transaction that occurs.
2. Contributing Gambling Factors: once someone is involved in the financial markets, there is a learning curve. Tim will be the first to tell you this. Many of his students began trading before learning his strategy, and only began making money once they had taken the time to go through his DVDs, video lessons, etc. How the person approaches the market will determine whether they become a profitable trader or remain a continuous gambler. The following two traits are easily overlooked but contribute to gambling tendencies in traders. First we have those that gamble (trade) for the excitement that comes of it. Emotions are a huge part of trading, and they are also one of the biggest hurdles. Just one trade has the potential to stir up these emotions of satisfaction, anger, power, etc. Trading the markets is exciting; it links the person into a global network of traders and investors with different ideas, backgrounds and beliefs. Yet getting caught up in the “idea” of trading, the excitement, or emotional highs and lows is likely to detract from acting in a systematic and methodical way.
3. Trading to Win, and Not Trading a System: trading in a methodical and systematic way is important in any odds-based scenario. One of the first lessons Tim teaches his students is that they need a plan before entering any trade. If you don’t have a plan, how are you supposed to decide when to exit the position? While making money is the desired overall result, trading to win can actually drive us further away from making money. If winning is our prime motivator, the following scenario is likely to play out: Jill buys a stock as she feels it is oversold compared to the rest of the market. The stock continues to fall, placing her in a negative position. Instead of realizing that the stock is not simply oversold and that something else must be going on, she continues to hold the position, hoping it will come back so she can win or break even on the trade. The focus on winning has forced the trader into the position where she doesn’t get out of bad positions, because to do so would be to admit she lost on that trade. Tim also tells his students to cut losses quickly, which is especially important for him since many of the stocks he is trading move rapidly. Good traders take many losses; but they are also typically small losses. They admit they are wrong and keep the damage small. Not having to win on every trade and taking losses when conditions indicate they should is what allows them to be profitable over many trades. Holding losing positions is why many people never end up making money trading stocks.
So before you enter another trade, ask yourself if you are actually investing, or simply gambling.