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Mythbuster – Investing is NOT Gambling

Gamble

Many of us would agree that we would make our money work for us, by investing it. Unfortunately, some are held by back by the belief that “investing is gambling”. We

Gambling vs. Investing

The environment in which a person is brought up plays a major part in his or her perception of investing. If one grew up listening to horrifying stories of how someone lost his or her entire savings in “playing” stocks, this person is more likely than not to have the misperception that investing is similar to gambling.

Nothing can be further from the truth. A standard dictionary defines “investing” as the action of  putting  (money) to use, by purchase or expenditure, in something offering profitable returns, especially interest or income. The same search for “gamble” reveals that gambling is defined as: To stake or risk money, or anything of value, on the outcome of something involving chance.

When you invest in a company by purchasing its shares, you are purchasing a small piece of the company (no matter how small). As the company makes profits and expands its operations, your stake in the company grows together with it. On top of that, the company will sometimes share its profits in terms of cash dividends to reward its shareholders.

Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is created except for perhaps the euphoria a gambler feels during a game. On the other hand, investing creates value. The money invested in the company will be used to grow its business, and eventually, the shareholder’s wealth. Examples of such companies include food and beverage operators Old Chang Kee (SGX: 5ML) and Sakae Sushi (SGX: 5DO).

Focus on the long term

Here at the Motley Fool Singapore, we believe that investing for the long term helps an investor to ride out business cycles. A famous investor who has done just that is Warren Buffett. Buffett compounded his wealth through investing in companies such as Coca-cola and Washington Post over a very long period of time.

Besides the common misperception that investing equals gambling, some choose not to invest for fear of investing in the wrong company.  One way to get around that would be to invest in a tracker such as the SPDR STI ETF (SGX: ES3); where it has returned a compounded annualized return of around 7% inclusive of dividends.

Foolish Bottom-line

There is no doubt that you will take on some risk when you invest. Some companies might not be well managed, or might go through the ups and downs of the business cycle. However, the key difference is that gambling is making a bet on an outcome that is largely or completely determined by luck and hoping you will get a big payoff in a short period of time while investing is committing money for the long-term in order to gain a reasonable financial return. A wise investor takes calculated risks and have already planned much ahead – and does not simply rely on the luck of the draw.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo owns shares in Sakae Sushi.