I have been lectured by people, who don’t know much about finance, with a trite phrase that “the stock market is just gambling”. Well, as with most hyperboles, it’s based on some truth and extrapolated to a huge inaccurate extreme.
First of all, if you are buying and selling like the YOLOers of Reddit (in the story at the bottom of this post), it is clearly gambling. You are just buying and selling pieces of a company, hoping that another person buys it from you at a higher price, and with no concern to what the actual business does or its financial health. While it’s interesting to read about this, this is not investing. It’s speculating, which is a fancy word for gambling. It’s based on the greater fool theory…you need more fools who are willing to buy a company at a higher price than you. The housing market boom of 2005 was predicated on such madness. So, in this case, the hyperbole by the amateur in finance is accurate.
If you, however, evaluate a company’s business, it’s management, it’s competitive moat, and then finally come to the numbers…to the sales, margins, earnings, balance sheet, income statement, sales and earnings growth, and then finally the stock price, EPS, Price to Book…only then are you actually investing. You are invested in the company doing well over the long term.
You should only buy a company as if the stock market was open today, and would not be open for another year. You’ll think differently than most stock investors, hedge fund and mutual fund managers, and certainly than these YOLOrs. Imagine being stuck with a bad stock for 2 years…you’ll avoid the losers, and ask yourself, “will this company continue selling this product successfully, or have more innovative products”?
Here’s a good rule to follow…sure, there are people who get rich fast. But the path of “fast” is littered with broke and despondent corpses along the way. Get rich slow…there are fewer casualties along the way, and a lot less gray hair.