Is investing really like gambling?

[Mr.Coffee]

I think part of my problem is I'm pretty much just a crappy investor. I should probably just buy an index and let it ride, but because I like to feel dangerous I buy stocks and watch them... not do very well. I'm also probably too impatient of an investor, if I left good stocks that I buy alone, I'd do better. I'm averaging about 3.5% right now............. not the greatest.

So yeah I look at the old mortgage and just question all the time if I am doing the right thing.

[Slava]

Originally Posted by Mr.Coffee

I think part of my problem is I'm pretty much just a crappy investor. I should probably just buy an index and let it ride, but because I like to feel dangerous I buy stocks and watch them... not do very well. I'm also probably too impatient of an investor, if I left good stocks that I buy alone, I'd do better. I'm averaging about 3.5% right now............. not the greatest.

So yeah I look at the old mortgage and just question all the time if I am doing the right thing.

Well it just so happens that I know someone who can help you with that kind of thing!

[Enoch Root]

Slava:

Just discovered this thread and had a quick read, and I wanted to comment on your early point that the market is a zero sum game and that there is a loser for every winner.

As others have pointed out, that isn't exactly right.

The markets continually go up (over time) because the underlying companies create new wealth for their shareholders. If no one ever traded stocks again, the current shareholders would continue to experience new wealth creation.

What I believe you were getting at, with respect to winners and losers, is a reference to active trading (i.e. alpha). By making active investment decisions, investors deviate from the market return. Some actions will win, and some will lose, and they are a zero sum game. If someone buys a stock, someone sells that stock. So, if it goes up, relative to the market, then the buyer 'won', by experiencing a return greater than the market return, and the seller 'lost', by forgoing that return.

Overall though, the market return is what it is - the total growth of all the companies represented is a calculable number (but there is a return there, not a zero sum game).

It is individual investors, by choosing this particular stock, or shorting that particular stock, that are zero-summing their deviations from the market return. Some win, some lose.

As for dividends, they are no different than capital gains (other than tax consequences). A company takes the investments of its owners (shareholders) and generates a return on that investment. The company can choose to distribute that profit to shareholders (dividends), or retain that capital for further investment, creating capital growth and a higher stock price. Either way, it means a return on investment for the shareholders.

[Enoch Root]

re the pay down the mortgage vs investing decision:

The math works in favour of investing. As heep illustrated, the stock markets have returned about 9.5% per year for the entire period of available data.

Especially with current interest rates, that obviously favours investing.

However, the second part of the equation is the risk tolerance of the investor. Having debt makes some people very nervous. It is entirely valid for an investor to place more utility in the comfort of paying down their debt than in the (larger) growth of an investment.

Personal preference.

My advice is similar to what yours was: do both

[Buster]

Originally Posted by Enoch Root

Slava:

Just discovered this thread and had a quick read, and I wanted to comment on your early point that the market is a zero sum game and that there is a loser for every winner.

As others have pointed out, that isn't exactly right.

The markets continually go up (over time) because the underlying companies create new wealth for their shareholders. If no one ever traded stocks again, the current shareholders would continue to experience new wealth creation.

What I believe you were getting at, with respect to winners and losers, is a reference to active trading (i.e. alpha). By making active investment decisions, investors deviate from the market return. Some actions will win, and some will lose, and they are a zero sum game. If someone buys a stock, someone sells that stock. So, if it goes up, relative to the market, then the buyer 'won', by experiencing a return greater than the market return, and the seller 'lost', by forgoing that return.

Overall though, the market return is what it is - the total growth of all the companies represented is a calculable number (but there is a return there, not a zero sum game).

It is individual investors, by choosing this particular stock, or shorting that particular stock, that are zero-summing their deviations from the market return. Some win, some lose.

As for dividends, they are no different than capital gains (other than tax consequences). A company takes the investments of its owners (shareholders) and generates a return on that investment. The company can choose to distribute that profit to shareholders (dividends), or retain that capital for further investment, creating capital growth and a higher stock price. Either way, it means a return on investment for the shareholders.

The other significant factor is technology: efficiency drives wealth creation by deflating the real (not necessarily nominal) cost of most goods and services over time.

[Slava]

Originally Posted by Enoch Root

Slava:

Just discovered this thread and had a quick read, and I wanted to comment on your early point that the market is a zero sum game and that there is a loser for every winner.

As others have pointed out, that isn't exactly right.

The markets continually go up (over time) because the underlying companies create new wealth for their shareholders. If no one ever traded stocks again, the current shareholders would continue to experience new wealth creation.

What I believe you were getting at, with respect to winners and losers, is a reference to active trading (i.e. alpha). By making active investment decisions, investors deviate from the market return. Some actions will win, and some will lose, and they are a zero sum game. If someone buys a stock, someone sells that stock. So, if it goes up, relative to the market, then the buyer 'won', by experiencing a return greater than the market return, and the seller 'lost', by forgoing that return.

Overall though, the market return is what it is - the total growth of all the companies represented is a calculable number (but there is a return there, not a zero sum game).

It is individual investors, by choosing this particular stock, or shorting that particular stock, that are zero-summing their deviations from the market return. Some win, some lose.

As for dividends, they are no different than capital gains (other than tax consequences). A company takes the investments of its owners (shareholders) and generates a return on that investment. The company can choose to distribute that profit to shareholders (dividends), or retain that capital for further investment, creating capital growth and a higher stock price. Either way, it means a return on investment for the shareholders.

Yeah I like these threads and such in general because the discussion lets me re-think things and understand things more clearly in general. So while my thought on this has changed I decided to leave the original post as it was anyway.