October 11, 2021

Article

Some might say investment is a form of gambling, but in reality they are very different.

Gambling:

We all understand placing £5 on the 3.15pm at Cheltenham is gambling, but there are many other ways of parting with your money that seem to promise great returns, but should not be considered sensible, long term investments.

For a while now, social media feeds, even posters on the underground shout about crypto currencies, and it’s easy to be led by the claims being made, of near-instant riches. But this is not investing, it’s gambling.

The fundamentals behind Bitcoin or other crypto currencies are not in place to offer any protection from down sides. By buying such currency there is no company in which you are sharing profits, you are betting that the value will go up because more people will want to buy it. Almost like a pyramid scheme.

This is not to say they won’t go up in value, they almost certainly will at some point, and they have done recently, but the potential downsides are too considerable to be ignored:

Consider any of these outcomes:

  1. A change in legislation in one or more countries rendering them unusable.
  2. A huge turn against them based on the (considerable) environmental damage that cryptocurrencies do to the environment.
  3. A panic sale based on sentiment alone.
  4. Hackers stealing the currency.

All are possible, some have already happened, and offer very little comeback to those who hold it.

Investing:

Investing on the other hand is simply a process of sensibly structuring funds such that they have a good chance of preserving purchasing power, and growing, in order to meet a monetary need in the future.

An individual company share has the prospect of a share in the future profits that company makes, and the possibility of an increase in value over time. Investing in a wide range of stocks in the Stock Market means sharing their collective success.

The method of doing this is to apply your assets to something that rationally has a chance of growing

Of course there are downsides to investing in this way, and markets will fall, but in the long term, the fact that most companies in stock markets will normally go on to continue making profits means that the value of stocks will normally return. It may just take a little patience in the meantime.

Of course failure, fraud or misconduct are not impossible in the corporate world but in reality, a well diversified portfolio should suffer very little from major shocks like those listed above for cryptocurrencies.

Risk and Fundamentals

The core difference between investing and gambling is the level of risk. Betting on the horses means the most likely outcome is you will lose the money. Investing long term in the stock market the most likely outcome is you will make money.

But to invest for the long term it’s important not to get carried away with what’s on a Facebook feed or a billboard, and stick to tried and tested principles.

Gambling might be more fun, and I enjoy a punt at the races as much as the next person, but is that really what you should be doing with any sizeable proportion of your assets? I’d suggest not.

Warning: investments in the stock market can go down as well as up, and returns are not guaranteed. Past performance is not an indicator of the future. Professional advice should be sought before investing.

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