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6 Signs You’re a Gambler and Not an Investor

Date: 21/07/2016

What is investing? Sometimes, to better understand what something is, it’s helpful to understand what it is not.

Would you like to hear the most painful investing mistake I ever made?

I had recently finished a degree in finance and was working as an intern for a large investment bank. Considering myself to be a sophisticated stock market professional, I borrowed big off my credit card to go all in on a technology company I knew was going to make me rich.

The Dotcom Bubble of 1999 had just burst, and I was sure the market would soon be climbing back up after taking such a big hit. After all, the professional analysts and Wall Street media gurus were all saying a new rally was just around the corner.

Having watched these shares trade for months between $100 and $120, I picked them up for $55 per share. As a gullible and naive young investor gambler, I believed the hyped analyst projections saying these shares were headed for $500+.

I still remember the call from my broker about a month after buying. These shares had climbed back up to $75, so he advised me to sell in order to lock in my 36 percent gain. Having laid in bed at night dreaming about what I would do with all my money once they hit $500 per share, I simply replied, “No, we’ll let it ride.”

shares dropMy emotions soon swung from greed and exhilaration to alarm and panic, then to horror as I watched my shares drop back to $55, then $45, then $35, and then $25. At this point, I made the only logical choice, one that any other investor gambler would make.

I maxed out my credit card to buy more of the exact same shares, and lower my cost basis. If they would only climb back up to $33 per share, I could sell, break even and chalk this all up as a painful learning experience.

I sold three years later for $2 per share.

I learned a valuable but painful lesson over those horrifying months: I was a gambler, not an investor. In hopes that I might save you from learning a similar lesson the hard way, here are six signs that you might be a gambler and not an investor.

1. You Speculate.

Speculation is defined as the forming of a belief or assumption without firm evidence or knowledge of the facts.

My first big foray into share investing was nothing more than speculation. I formed a belief, or rather an assumption, that my shares would rise to $500 per share, based only on their current price relative to a historical price, and the confident assertion of an investment bank analyst.

I did not investigate the company, nor fully understand its core business. I did not even seek to understand the basis on which the analyst was making his assertions about the company’s future value. I chose to blindly trust his opinion, failing to consider how he might benefit from making such a bold recommendation.

These exact same mistakes are made each and every day in the property market. Investors blindly follow the opinions of others, failing to investigate the facts behind the assertions that the so-called “experts” make.

Here are a few of the most common assertions I hear:

  • “This area is projected to grow by 10 percent per year.”
  • “This property could easily rent for an additional $50 per month.”
  • “You could easily fit four or perhaps even five units on this block.”

Speculation is grounded in hope, not fact. What is your system for separating fact from hope and opinion? If you don’t have one, you’re a gambler, not an investor.

2. You’re Driven by Emotion.

value of homes is driven by emotionThe value of residential property is in part driven by emotion. For the owner-occupier, the decision to buy a home is based on lifestyle emotions. People are willing to pay more to live in an area that makes them feel happy.

Investors can get caught up in emotion, as well. In greed, they might chase ever-increasing gains, regardless of market fundamentals. Conversely, they may fearfully chase losses, hoping to turn around a deal that’s clearly gone bad. Either way, they rely on feelings, not knowledge.

Legendary investor, businessman and poker aficionado John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.” Markets are emotional, but investors shouldn‘t be.

When my shares were climbing, I felt euphoric. I thought I was the smartest 23-year-old on the planet.

Once they started falling and reached my buy price of $55, my pride prevented me from acknowledging the safe option to break even. I was greedy and held onto my dream.

At $45 per share, I started to get scared, and began regretting not taking my winnings off the table earlier. At $35 per share, I felt awful and began imagining the pain of making interest payments on this credit card debt. At $25 per share, my ego led me to chase my losses even lower by doubling down. At $15 per share, I stuck my head in the sand and tried to forget about my defeat. It was all too painful.

There was no strategy and no plan. Every decision was guided by emotion.

Having worked personally with hundreds of property investors, I’ve seen greed motivate people to buy when and where they shouldn’t have bought, and I’ve seen fear and ego prevent people from selling, still long after they should have sold.

Betting big on real estate may be thrilling, but your financial future is too important to gamble with for the sake of a cheap, or a not-so-cheap, thrill.

3. You Rely Primarily on Chance.

Chance is defined as the occurrence of events in the absence of any obvious intention or cause. When something happens, it does so randomly or by accident.

Chance is not skill-based. Because the cause of the event is unknown, the outcome, no matter how desirable, cannot be duplicated.

The benefit of getting results that can be traced back to skill is you can do the same thing again and get the same results. You can duplicate it over and over again. That’s what smart investors do.

Relying on chance rather than skill brings a low probably of success. Warren Buffett once said, “Risk comes from not knowing what you are doing.”

When you don’t know what you’re doing, you have little choice but to buy, hang on, and hope for the best. This adds an immense amount of risk to your investing.

Unless you have a skill-base from which you make your investing decisions, you are a gambler, not an investor.

4. You Have Little Control Over Your Outcome.

The most common strategy of property speculators in Australia is negative gearing. This is a strategy that provides immediate tax benefits with the hope of achieving long-term gains in the form of capital appreciation.

The Australian Taxation Office (ATO) allows property investors to offset the income loss of a rental property against any other personal income. Negative gearing, when the costs of owning and operating the asset are greater than the income it produces, provides this tax benefit.

Unfortunately, a negatively geared investor has little-to-no control over the investing outcome. This strategy amounts to little more than a gamble on the future direction of the market.

The only way to win is when annual capital gain after inflation is consistently greater than annual income loss after tax savings. Otherwise, it’s a waste of time and money.

Negative gearing, a purely speculative strategy, is the most common form of property investor gambling.

5. You’re more Likely to Lose Than Win.

When you gamble, the odds are not in your favour. The house wins most of the time. You might get lucky and win in the beginning, but the probabilities are such that the longer you play, the more likely you are to lose.

investors One of my greatest concerns for the future of Australia is the massive debt load we have taken on as a nation. Home prices continue to rise and we continue to borrow, but how are we going to pay back all of this debt if interest rates rise.

Many investors erroneously believe they are smart investors because they’ve stumbled into success by chance. They’ve gotten lucky. Lacking skill, they do all they know to do – keep buying.

I’m encouraged when people join our mentoring program and say, “I know I got lucky before, but I can’t rely on that to happen again.” They accept responsibility for their future and take steps to increase their knowledge before they rush out and buy again. This makes them more likely to win.

6. You Exhibit Signs of Addiction.

One of the traits of problem gamblers is that winning becomes the most important thing in the world. They compromise their values, and all of life begins to revolve around winning. They often end up sacrificing the more important things to satisfy their addiction.

King Solomon of Israel, one of the richest men to have ever lived, once wrote, “Those who love money will never have enough. How meaningless to think that wealth brings true happiness!”

Achieving your wealth creation goal will never meet the deepest need of your soul. If you rely on investing wins to provide you with feelings of importance and significance, it could be a sign that you’re a gambler and not an investor. It may also drive you to make some really dumb decisions.

I’m convinced that one of my motivations in going all in on that tech company in my early 20’s was because I was chasing feelings of validation. I was insecure and thought that making a lot of money would make me feel more important.

The starting point of true happiness, and therefore successful investing, is a contentment with and gratitude for the more important things that one already has – like family, friendships, health, meaningful work, and life’s basic necessities.

From this place of contentment, without needing investing wins to help you feel better about yourself, you are in a much better frame of mind to establish worthy goals based on a meaningful “why” and systematically work toward them using a proven system and plan.

That is investing.

Break Your Gambling Habit

homework before buyingProperty gamblers acquire assets and hope for the best. They have little or no control over their outcomes, they fail to plan, and they do little homework before buying.

Property investors are outcome-driven. They begin with the end in mind, and work backwards to establish a clear and thorough plan for making their profits. They are prudent and buy only on fact. They skillfully and actively manage their properties, and only sell when appropriate.

If you could use some help breaking your gambling habit, check out Steve McKnight’s Property Apprenticeship training course.

Profile photo of Jason Staggers

By Jason Staggers

Jason is a personal mentor working with Steve McKnight's Property Apprentices. He has helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom.

Comments

  1. Profile photo of Cattleya

    Jason,

    Interesting article.
    Would you please explain “..a negatively geared investor has little-to-no control over the investing outcome. This strategy amounts to little more than a gamble on the future direction of the market.” further?

    I am not sure I understand it completely. Would be grateful if you’d elaborate, please.

    Many thanks,
    Catts

    • Profile photo of Jason Staggers

      Hi Catts.

      You might want to read this article I adapted from something Steve McKnight previously wrote:https://www.propertyinvesting.com/negative-gearing. It’s fairly in depth.

      The short answer… The only way to profit through a negative gearing strategy is for all homes in the same area to go up in value (generic growth). Because we can’t predict the future, it is a speculative approach.

      Some people that I’ve mentored admit that they’ve gotten very lucky buying at the right place at the right time. Others not so lucky and are trying to unwind their mistakes. We try to teach people to be much more outcome focused and design a strategy that will take them to their goal. It’s a more active and intelligent approach.

      Hope that makes sense :-)

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