The Motley Fool

Why You Should Not Treat The Stock Market Like A Lottery

Most people have probably made a bet or two at Singapore Pools, which is the lottery and legal betting arm of the Singapore Tote Board. It is fun to make a guess on the winning numbers for the Toto Draw, or try one’s luck at winning the first prize of S$2.3 million in the Big Sweep.

But when it comes to investing in the stock market, some investors continue to treat it as if it were an extension of the Tote Board. They perceive the stock market to be a place where you can “score” big “wins” by recklessly punting and gambling on shares. Here’s why this might end up being detrimental to your wealth.

“Hope” Analysis

People who carelessly fling money at companies in the stock market due to tips and rumours are engaging in what I term “hope” analysis. Similar to the mindset taken in a lottery game, they are simply hoping that whatever they purchase turns out to gold, without doing any of the necessary due diligence or research.

Gambling Mindset

These punters also have a gambling mentality whereby they expect quick (and easy) profits within a short period. This is similar to placing bets in lotteries where the results are announced within a week or two. Stock markets consist of a collection of businesses which grow profits in a slow, steady and sustained manner, and are not set up to provide quick gains to any investor in the short-term.

Operating Companies Generating Cash

As investors, we should view the stock market as an avenue for companies to raise capital to grow and expand.

It is a place where we should park our capital in great companies for long periods to enjoy the slow but steady process of compounding. Short-term volatility and fluctuations in share prices may provide fuel for gambling and quick gains, but this practice is not sustainable in the long-term and would only be detrimental to one’s financial health.

The Foolish Bottom Line

There is a saying in casinos – “The House Always Wins”. If a person has a gambling mindset and behaves in a reckless and imprudent way – buying shares on a whim and selling for flimsy reasons – then the party who will always “win” would be the brokerage houses, as they are the ones who will make money from every trade. Investors should adopt a long-term perspective in the stock market and do their homework before deploying capital so that they can grow their wealth steadily in a consistent manner.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.