My first encounter with someone trying to time the stock market occurred when I was nine years old, at church, of all places. I was sitting in the foyer, waiting for my parents to finish socializing so that I could go home and jump on the trampoline.

While waiting as patiently as a nine-year-old could, I (naturally) eavesdropped on the conversation of two “old” guys standing next to me. (Old, when one is a child, is anyone over 30.) One guy was complaining to the other about his recent losses:

…so it climbs to $3.63 per share, and I think, “This is definitely the top!” So I sell all my shares.

By the end of the day, it closed at $3.96! If I’d only waited 4 more hours, I would have made $12,000 more…

The other guy just shrugged his shoulders and sighed, as if saying, “Well, that’s just how investing in the stock market goes…”

I shook my head in amazement that such fortunes could be made and lost so quickly. It seemed the Gods of the market were more fickle than my infant sister.

But I didn’t philosophize on the stock market for long, there was a 10-foot wide trampoline waiting at home for me.

Back to the Future

As I aged and thought more about that experience, I started to believe that stock market investing was nothing more than an elegant form of gambling. That the guys (and girls) who made money were the ones lucky enough to guess when to buy low and sell high. And the losers were the suckers on the other end.

But was I right?

Is investing in the stock market gambling?

The Answer

The answer, I would submit, is more nuanced than a simple yes or no. I believe that it is possible to invest in good businesses and it’s also possible to speculate (gamble) on stocks.

Let me show you the difference. There are two ways to determine whether you are gambling or investing: (1) time horizon and  (2) chosen instruments.

Let’s look at both.

You Gotta Know When to Hold ‘Em

The first distinction between gambling and investing has to do with how long you hold on to the stocks you buy–what the industry calls your “investment horizon”. The gambler (hare) will buy and sell stocks hourly, daily or weekly depending on the short-term rise or fall of the price of the stock.

The gambler cares not about the underlying company whose stock he buys and sells, only that the price goes up or down.

The investor (tortoise), on the other hand, is in it for the long haul. She chooses companies (or groups of companies) that she believes in and buys a part of that company for the future.

She is optimistic about the long-term outlook for the market/economy that she invests in and ignores the day-to-day fluctuations in prices.

In short, the gambler buys and sells stocks based on short-term performance. The investor buys part of a company based on its long-term prospects for growth.

Wrath of the Alphabet Soup

Another way to distinguish between stock investing and gambling is by the instruments one buys.

The gambler loves the latest and greatest newfangled type of exotic investment. MBSs, options, futures…the gambler (hare) loves to bet on stock prices.

Options are bets that the price of a stock will rise or fall to a certain price at a certain date. Futures are contracts to buy or sell an asset in the future at a price specified today. Betting on prices–a clear winner and loser.

MBSs (mortgage-backed securities) and its cousins form the alphabet soup of investment inventions too complicated for most people and even self-proclaimed financial experts to understand.

The investor takes a much simpler route: she buys stocks and stock (mutual) funds. Simple and easy to comprehend. She purchases a part of a company (or many companies) and her success rises or falls with the performance of that company and the overall market.

For the investor to win, there does not have to be a loser.

By now, you should know my investing philosophy. Be an investor (tortoise) not a gambler (hare). And pick up my free Minimalist Guide to Investing to learn how to start investing for your future.

Tags: investing philosophy, stock picking, stock speculation

• Digg
• Stumble it!
• Reddit

• How to Screw Up the Biggest Purchases of Your Life
• Why are Poor People Poor?
• Don’t Carry Cash in Your Wallet or Purse or Murse