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14 Aug 2022 18:35
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  •   Home > News > Business > Features

    Investor is not a Gambler

    Many years ago - well before computer games were dreamed of - there were a number of classic games that could be found in every takeaway bar in the country.

    Investment Research Group
    Investment Research Group
    One was modeled on a golf game, where you put 2c in the slot (I told you this was a long time ago) and, using flippers, attempted to move the money past some gaping holes in order to get your money back.

    The other involved putting your money in and getting several metal balls, which with a flipper could be sent spinning around some slots. If the balls went into the right slots, you got twice your money back.

    One day, when I was aged about 10 years old, my parents gave me 15c to go the neighbourhood swimming pools.

    But there was one problem. My best friend Michael didn't have a penny to his name and it just wouldn't have been fair to ditch him and go by myself.

    Therefore, I came up with a cunning plan. We would 'invest' my 15c in the metal balls game until we had 30c back!

    Unbelievably, given the difficult nature of the game, we had win after win and eventually accumulated a purse of 28c - a gain of 87% for just a couple of hours work!

    To this day I remember saying to Michael, 'One more spin and we're going to the pools'.

    You can guess what happened next. We suffered loss after loss, interrupted by just enough wins to keep us interested. Eventually we were down to zero, a loss of 100% in just a few hours.

    That day taught me a lot about risk and reward and I don't think I have ever seriously gambled since.

    Share market investment is not gambling and it never ceases to amaze me how many people think that it is.

    These people, of course, tend to either avoid the market or indulge in risky penny stocks, active trading or massive leverage through products like contracts for difference (CFDs) which is essentially a bet on the direction a share price will move.

    Prudent share market investment, on the other hand, is about minimising risk as much as possible. We do this by concentrating on the financial strength, resilience and intrinsic value of companies whose shares are traded on the NZ and Australian share markets.

    Notice we are interested in the companies, not the shares. Focusing on the shares - as most investors including many brokers and analysts do - leads you down the road of trying to figure out what a share is worth and whether it is about to go up or down in price.

    If you focus on the companies - and are confident about their ability to continue making money even during periods of economic downturn or other setbacks - then it is possible to relax and ignore the price of their shares from day to day.

    As legendary investor Warren Buffett once put it: "In the short run the market is a voting machine, in the long run it is a weighing machine".

    I firmly believe that successful share market investing comes from taking a different approach to valuing and owning companies than the major players - who essentially are the market.

    One way to do this is to outlast those who rely on guessing what company earnings or share prices are going to do in the next six or 12 months.

    Buying those with the capacity to do better than the doomsayers believe - and holding for a multi-year period - can and does bring significant rewards.

    © 2022 David McEwen, NZCity

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