Is Trading Stocks Gambling?

If you have been trading a while, no doubt have you heard (usually from people who aren't trading or have lost money), that:

1. Investing is super risky, best leave it to the professionals.
2. All you are doing is gambling
3. The market is manipulated against the small fish (if you know this it invalidates the argument).

It always comes down to: "Isn't it just gambling?"

My answer is always the same: "That depends on how you define gambling".

Just as in any walk of life, how people perceive things typically shapes their 'reality', investing or trading is no different. For me, not learning how to trade and manage my personal finance is the ultimate 'gamble'. Without having access to global financial markets, I would never be able to attain a diverse base of assets that creates financial freedom.

Financial freedom, being, if I want to turn down a job, leave one or simply not work for an indefinite amount of time, it's possible. Yes there would be sacrifices but having the printing press putting wind in your sails sure helps.

Leave it to the Pros

If you think stock trading is risky, maybe take a look at your pension fund or 401K. The same proponents and pundits who tell you to stay away from the stock market, will have no problem investing on your behalf and chewing away at your years of hard work. The professionals:

Many pensioners are holding complex trading instruments and have no idea how to get out before the crash. This means some retirees get caught with a 50% haircut on their retirement money in some cases.

So is trading stocks gambling?...

If you boil it down to what most consider as the 'Poker style' or casino cliche. Then sure, it is gambling! Trading stocks is simply being the house instead of the player. It means you need a statistical advantage or 'edge' where your buying and selling of assets ends in profit more than loss over time.

Just like odds in poker, trading involves finding likely situations where the odds are in your favor, and exploiting them without putting all of your 'chips' at risk. This sounds very easy, and I have no doubt that it can be, however, us humans are not wired to think objectively all the time. This is our primitive 'gift' of being fearful and avoiding risk works in the old world but hinders how we perform in trading.

So in a classic sense, trading stocks is gambling. I would however prefer to gamble as much as I can if I was confident I would make great returns with probability on my side.

Not accessing, understanding and at the least exploring investing at all is a far more perilous gamble and here is why:

Placing Your Bets

To better understand gambling. Let me illustrate other losses you can incur if not prudent with your cash. Not being in an asset can basically stock the probabilities against you. Not always (in some periods of deflation, cash is king).

There are however silent thieves and lifestyle implications when you consider coming to the table, or being the house. Some considerations:

1. Central banks, Inflation & Monetary Fuckery
2. Emotional & Psychological Risk
3. Financial - Preventing Loss and Cash Efficiency

1. Central Banks & Inflation

If you are not familiar with debt, central banks and the basic mechanics that drive our economic machine -let me oblige with the most simplified version you will ever see on the internet. This is based on multiple Modern Monetary Theory principles and will help you understand everything about modern finance. Drum roll....

They print a fuck ton of money,  no seriously...

Central banks have a history of letting things get out of hand.

In fact, the global Central Banks of late, have recently said they will basically print unlimited money, there is a fab video on this by a recent add to my small circle of influences George Gammon:

There you go. No need for Harvard, Yale or MIT. You now know more than almost all commentators you've heard on the news. Well done! Here is what you get.

1. By increasing the money supply, your money, if kept in cash, is being eroded. The more they print and 'stimulate' or create debt, the less your cash can do for you.
2. The modern paradigm is that more debt is good, it's cheaper than ever and in some instances we have negative rates - they literally can't give this shit away fast enough.
3. All of this cheap debt and money has to go somewhere which is typically into assets (like stocks) that provide a better return and beat inflation

So the long and short of this risk is simple. If you are in cash when the printers are full steam ahead, your money is losing value. A simple principle in investing is "do not fight the fed" AKA the federal reserve. If they are giving out money and goods become more expensive, having less buying power is basically guaranteeing a loss!

Not being invested in some kind of asset, be it housing, stocks, bonds, gold etc gives you a guaranteed 2% loss per year in buying power, or 15% like some periods in the last 100 years. This is a hidden tax on your money.

2. Emotional & Psychological Risk

Another risk seldom considered is the emotional and psychological risk associated with investing, trading or doing nothing. In fact, I have been here a few times personally and found some patches of trading extremely stressful, you can read more about this in stress and trading. To me, the risk was to my mental health.

Trading and investing using different style and strategies should really align with who you are as a person and whether or not you are happy to bat for the fences and either: i) Strike it big and become stupidly wealthy or ii) Lose everything and have to rebuild using that same strategy.

The other option is to invest in indexes and slowly build income from the stock market using other methods. In this case you risk missing out on major opportunities that can only be exploited by trading shorter time frames or different strategies. Of course there are multiple other avenues to become wealthy, all of them however require a decision and commitment. Making the wrong decision or following something blindly due to sunk cost bias can be the difference between being wealthy... or not.

The ebb and flow of what we want to do with our money causes lots of stress. It involves being fully accountable for results which in itself can be a major stress.

Simply put, not making a decision, is a decision! You decided to not decide. The subconscious psychological impact around 'money' and 'success' lead to physiological disturbances. So is trading risky? OR is being bitter at people doing well in the market risky?

Side note: Psychological risk or fear of missing out and 'what our neighbors think' is another form of psychological risk but I will explore heuristics at a later date. There is a lot of pressure to look good these days, this is one of the biggest traps we can succumb to.

I did a video on 'fear and missing out' a while back that you might find helpful on this topic:

3. Financial - Stop losses, position size

The more practical side of risk (often not considered) is literally how much you are willing to win or lose on an asset or idea. Far too many people do not understand risk tolerance in their personal finance until it is too late, extravagant homes are bought as investments and some families or individuals go 'all in' - this sounds like gambling to me!

Many times, I've had calls from friends who were 'Traders' that lost a bunch on a stock and now own it for life. This is what Mark Minervini calls 'an involuntary investor'.

Holding on to bad ideas ties up your money and is highly risky. The more you hold onto a losing investment, the harder it can be to recover. The chart below shows just how hard that can be:

So on one hand, we have people saying that the stock market is risky but those very people have been burned by holding poor stocks, not having a clear strategy and essentially been a high roller at the casino.

Understanding at least a rudimentary amount of knowledge is a prerequisite for investing. How much are you really willing to lose? What kind of lifestyle do you want. Are you willing to learn and execute the right principles to keep clear from large wipe-outs?

Before any business or trading decision (and most in fact). Knowing what you are willing to lose in order to gain something is important. Risk should be limited, gains should be unlimited.

Another Consideration in Position Sizing and Loss

Another subtle implication of holding losing stocks is that most novice investors who adopt the "it will come back bro" mentality fail to consider the inefficiency of cash being trapped in a stock liquidity. That is not to say a stock won't return, it just means that it's not going up now. And until that moment you are trapped.

This of course again comes back to the most important elements of any trading system or investment strategy - knowing yourself and the nuances of your personality under stress.

In Brief

When it comes down to it, every decision we make in life as in investing, comes down to wanting a favorable outcome. Belief systems about the stock market are typically hereditary or heuristically informed which results in a distorted view on what makes money and what doesn't.

Money itself is far more than a means of exchange but a philosophy that informs how we relate to ourselves and the external world.

Labeling trading stocks or investing as 'gambling' simply does not mean anything! There are professional gamblers just as there are unprofessional investors. It really comes down to understanding that there are thousands of strategies out there and many of them make money. It takes time, dedication and lots of failure to find something that fits your own financial fingerprint.

So again, is trading stocks gambling?

So yes, all of these things involve risk and probability so could be called gambling. In the same way that marrying wrong by lacking self-awareness could ruin your life.

It's all about gaining knowledge, finding a groove and making sure the odds are stacked in your favor. As in trading, as in life.