Investing With A Gambler’s Mentality
“Do you play the stock market?” “Which stock are you playing now?” Do these sentences sound familiar to you? Many ‘investors’ invest (speculate is a better word..) with a gambler’s mentality, attempting to ‘play’ the market through series of buy and sell. By associating investing with the word ‘play’, investment becomes a game, just like gambling. In any game or sport, different players come with different level of skills and thus, they can be ranked accordingly. Unlike a sports player whose level skills can be evidently displayed in a couple of hours, it could take years to tell apart an investor with ’skill’ and an investor with luck.
A colleague shared with me during a discussion that her client was looking for an IPO fund, ie a soon-to-be-launched fund that is still collecting money. A private banker has recommended such an IPO fund before to the client and he has made money buying into such an IPO fund and selling after a few months. Many stock punters like to bid for IPO stocks and sell them to earn a quick buck. especially during a bull market. No though is given to the fundamentals or asset allocation considerations. This particular banker has successfully sold the idea of a new fund having similar features to an IPO stock. And why sell such an IPO fund=IPO stock idea? The fund can be sold after a few months. And the reason for this type of frequent buying and selling should be very clear…
There is no such thing as a IPO fund=IPO stock. The fund’s performance comes from the underlying holdings. Any upside or downside comes from the holdings and not because the fund ‘IPO-ed’. In fact, buying a new fund carries more risks as the fund may not collect enough money and close down, before it even started. This was quite common recently due to the financial crisis. Other risks would include lack of track record and dangers of the fund being a copy cat me-too fund in some hot theme that has gone up considerably.
Asian investors are more likely to have a gambler’s mentality compared to the Europeans. A ex-analyst with a global bank shared her experience during a fund training for her new job at a fund house. Asian clients do not want to do proper asset allocations and prefer funds in hot themes, unlike their European counterparts. This creates a situation with ‘2 willing parties’ – a client willing and eager to buy a hot fund and another party willing and eager to sell one to meet sales quotas. In Chinese, this ‘2 willing parties’ situation is called ‘一个愿打，一个愿挨’.
Do not ‘play’ the market. If you want to ‘play’, be prepared to lose in the long run.
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Tags: Investment Blunder, Mis-selling
Hi Tiang Chuan
I would say it’s not all wrong to speculate on a market. Speculators have a role to play to provide liquidity – a willing buyer and seller at most prices allowing for investors to go in/out of the market.
But the issue would be to ‘play’ the market without understanding one’s intention. I.e. if you want to punt, do a punt and be prepared to watch the screens to know when to exit/enter.
Problems arise when people are punting but they think they are investing. Vice-versa, when people think they are investing but actually, they have no investment horizon, no target return, no risk assessment of their risk tolerance and have no understanding of the underlying investment.
That is when “playing” the market is risky.
Be well and prosper.
Hi Panzer,
We can probably group speculators who know what they are doing as traders while those that do no as simply speculators. In my opinion, there are too many speculators who think they are true traders. The post is directed more at these speculators.
For long term investors, its actually good to have speculators or traders around. They can ‘take advantage’ of the liquidity provided by traders and speculators for portfolio management purposes, meaning, they can still do a buy and sell easily even when they don’t do it that frequently.
Like what you mentioned, problems arise when there are misunderstood identities.
Thanks for visiting my blog.