Is Stock Trading Gambling?

Hello World,  

First off, a #rant!

I missed a post! My excuse is that life got in the way!

This one was scheduled to go live on 10th the Thursday! A very hectic work week underlined by an ill-planned business trip to Chennai (for which only I am to be blamed) made sure that I missed my first post within the first month of this project 🙁

But the fact is that no matter what you venture out for, life will get in the way. That is just how it is!

All you can do is to find a workaround and make sure you keep grinding. That is what I intend to do!

My penance is to have an additional post to be squeezed in the next couple of weeks and have a pipeline of content to ensure I have a backup if in case life decides to have a bit of fun again 🙂

Backstory to this post!

On 26th of December 20187, I attended the wedding reception of a family friend. My parents and I drove down from Trivandrum to Ernakulum, which is a 6 hour journey. We ended up reaching the place a bit earlier and while waiting for the function to begin, I was introduced to Mr. X, a 50 something gentleman.

Mr. X runs a pretty pop trading brokerage firm in the city and is doing very well for himself.

This was around ten days after I kicked off this blog and I was thrilled to have run into him. For me, it was an opportunity to pick his brains. I told him about my interest in trading and saw a bit of skepticism in him.

He quizzed me a bit more as to why trading.

After hearing me out, he told “Trading in one way is just gambling. Real money is in investing. People now a day are impatient and addicted to quick returns”. He also threw in a Warren Buffet quote for good effect.

I am not sure if he made that statement to dissuade me from burning my capital or if that was his genuine perspective. Unfortunately, our conversation was cut short and we parted with an understanding that we will catch-up soon in his office.

This got me thinking big time!

I knew there was a general skepticism around stock trading from folks without exposure to the domain. I am pretty sure my parents and in-laws can’t fathom someone trading for a living and that is understandable.

What I wasn’t bracing for was a guy running a brokerage firm telling me that trading was gambling?

A while back, I would have nodded my head and accepted it without any question. Hell, I might also have dissuaded anybody who dared to talk to me about stocks quoting Mr. X!

I am in fact credited to be convincingly dissuasive 🙂

But times have changed!

I have listened to more hours of content on trading in the last 18 months than I have listened to music in my entire life!

The amount of reading I have done on trading is almost equal to the amount of reading I have done on cricket over the past year, which is a big deal since almost all my days start and end with cricket!

This has made me realize that a lot of folks have made a lot of money out of trading and that is not by chance. Most of them had certain specific qualities, which they repeat day in and day out.

So, here I am, noting down my learning about how gambling and trading are similar and yet poles apart!

Stock Trading is not Gambling. So do not approach it like it!

So, why is the Bad?

One of the primary reasons why stock trading is likened to gambling is because, at the most basic level, the process looks the same.

Both are zero sum games. This means the loser hands over the money to the winner.

And words such as punts, odds, predict/guess, are unfortunately used interchangeably to define both gambling and stock trading!

Let us take the example of a Roulette game. It is the same game in the image made iconic by a lot of Hollywood movies.

In its most simplistic form, a person playing a game of roulette will pick a number on the wheel. The dealer will then spin the wheel with a ball trying to settle itself in one of the slots with different numbers on it.  If it settles in on the slot with the number chosen by the player, he wins. If it doesn’t, he loses and hands over his investment to the dealer.

Most people view stock trading in similar light!

A trader selects a stock of choice from thousands in the market. Once you take a trade, it can go either way, which is beyond any ones control. In the most obvious scenario, if the stock goes up, the trader makes money. If it goes down, the trader loses money.

All that is true but what one also needs to understand is that Stock Trading is a humungous business, with a lot of players and impacting variables in it. Once you understand and accept it and establish your space, this is a gold mine!

Anha! But that still doesn’t tell me if it is gambling or not!

Unfortunately, the answer is obvious, but not straightforward. Though the statement might seem a bit confusing, it is actually fairly simple!

Stock trading is what the trader sees it as! It is a gamble if the trader sees and approaches it as a gamble. It is a science, if the trader sees and approaches it as a science!

Still grainy? I will explain!

As mentioned in this post, there are two different approaches in the market – Investing and Trading

Investing focuses on unlocking the value of a stock over a period of time, mainly through the fundamentals of a company whereas trading focuses on riding the current trend to make money using technical analysis.  

The fundamental approach relies on company growth, whereby, anyone who invested in it early enough grows together over a period of time. On the other hand, stock trading, as mentioned above is a zero-sum game.

It is also a fact that majority of traders lose. In fact, the stats are terribly skewed – 93% of traders lose money in the market to remaining 7%.

This, in turn, means that, in the long run, the 93% are gambling and the 7% are approaching the entire business of trading scientifically.

So what does a scientific approach consists of?

Preparation

A gambler is swept into the world by gambling with seldom preparation. You don’t know your hand. The probabilities are skewed against the player and once in, you have absolutely no control over the outcome and your previous performance gives you no indication of how the future will be. There is absolutely no guarantee your luck will continue, improve, or decline!

Trading is very different. It is a game of probability but there is a way to figure it out. You have to keep preparing yourself like how a seasoned chef would prepare himself before cooking for a 1000 person feast. Identify a menu, sharpen your knives, prep your ingredients, have a plan and stick to it.

As mentioned in this post, stocks tend to move in similar patterns over a period of time at different price points. As a trader we have access to all the date we need to analyze and figure out the movement.

It isn’t all guts. In fact, it is seldom guts in the long run. You might have a win or two but on an average, you will end up losing all your capital, if you use guts as your major tool for trading.

Instead, successful traders carefully evaluate a trade for risk and return, based on historical data. They backtest their strategies extensively to sharpen their strategy.

Based on the evaluation, a hypothesis is built by the trader. Once they enter the trade, it is observed constantly to make sure that the hypothesis remains valid. On getting an indication that the hypothesis is turning invalid, the trader has an option of getting out of the trade without major capital loss.

Also, trading lets you make more money on your right decisions and cut your losses on wrong decisions.

In gambling, even if you make money, a new decision, brings you back to square one with the same amount of risk involved in it.

Psychology

This is one area where trading and gambling are most similar and the statement, Stock trading is what the trader sees it as!” is most relevant.

If they see it as a happy place, it becomes happy. If they see it as a stressful venture, it becomes stressful!

Whether it is trading or gambling, money is at stake and a rash mistake costs dearly.

But when it comes to gambling, you get sucked into the cycle. It drains you emotionally and makes you take riskier decisions. There are no rules you can rely on to save yourself because the probability is stacked against you. You keep going on and on without a clear safety net to save your capital.

Trading is similar in terms of risk but inverse in terms of approach. It gives you an opportunity to box yourself with a set of rules which insures you.

The best of traders use rules to eliminate emotions from their trades. And this works only because the probability can be assessed to support your decisions.

Universe

In gambling, you are sucked into the casino’s universe. From the moment you enter, you are in their territory. They will drive the conversation and influence your decisions.

Trading, on the other hand, lets you set your universe to your comfort. This can be in terms of what stocks you want to trade, what risk you want to take, what loss you can afford and what return you want to make and you can exit at the very moment you feel like doing it.

It is a defined system which helps you keep your fate in check.

Spectrum of Learning

Gambling leaves a very narrow leeway for the player to learn. Once you move over the rules and the way the game of your choice is played, learning becomes one dimensional in terms of practice.

Trading is a whole different level in terms of learning. Market is never the same and a strategy you are using today might not work tomorrow. So, you have to keep evolving. Evolution is in term of concepts, strategies and experiences.

And if you don’t evolve, you end up at the bottom of the food chain for the stronger ones to eat up!

Conclusion

To summarize, trading is gambling for those who fall into the 93% of the population. Our objective is to fit into the 7%.

Approach it scientifically!

Create your universe. Set your rules. Be within them and keep growing.

You will end up losing money. That is a given. You just have to make way more money than you lose. It is like any other business. If a possible loss is going to deter your first steps, then trading is not meant for you!

What I would suggest is to take baby steps. Get learning. Build you appetite slowly, before plunging in with your entire being 🙂

In the next post, I will talk about how I went about creating a universe for myself while I try to learn stock trading. This I hope will help you create your own 🙂

Until Then, Cheers

Tribin

Reference for this post:

  • I have referred to this video by Adam Khoo. His videos are something you shouldn’t miss while trying to learn more about trading.
  • Another video that I referred to was by Sasha Evadkov from TradersflyHe also puts out solid content and has an unique way of explaining concepts 🙂

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