Lesson 3: So You're a Gambler?
The Thin Line Between Speculating and Gambling
“So you’re a gambler?” My son asked as I was reviewing some stock charts of my positions and explaining to him how I was betting on the price to increase.
I let out a half a smile.
This was a question that I had asked myself multiple times. After all, isn’t that what I do? I make bets and make my money off those bets. To be sure, there have been many trades during my career that were gambling at best. You know, trades based on buyout rumors, chatroom hype, binary bets on earnings announcements of FDA approval, and cheap stocks suddenly being pumped. — Sometimes those bets paid off, but most often they did not. I had to evolve and find an edge. Yet, even now, I ask myself am I gambling or is this my trade before hitting the button?
“I prefer the term speculator,” I smirked as I replied.
"Are they the same?" my son asked, his eyes curious over the rim of his juice glass.
"Not quite," I chuckled.
"Son," I started as we settled into our usual spots in the living room with the fireplace blazing as I drank my coffee. "Remember last week we discussed the supply and demand, and how charts all told the story of the market?” He nodded.
A market is a collection of the hopes, dreams, greed, and fear of the people involved. To understand the difference between speculation and gambling we need to talk about who are the players in the market.
He looked up from his bagel, intrigued. "Who are the players"
"First, there are the retail investors," I said, pointing to a small blip on the chart. "These are everyday folks like us, trading with their savings, often driven by news or social media buzz, and heightened emotions." Sometimes we call them “dumb money.” A lot of them don’t have systems.
"And then you have institutional investors," I continued, drawing a larger circle around a more significant price movement. "These are the big players - mutual funds, pension funds, insurance companies. They move huge volumes of money, often based on in-depth research and long-term strategies, or using quantitative strategies. They’re called smart money”
My son nodded, absorbing the information. "What about those who trade for a living?"
"And then, there's the market makers," I added, "who ensure there's always someone willing to buy or sell, keeping the market liquid. They profit from the spread between buy and sell prices."
His eyes widened, "It's like a whole ecosystem!"
"Exactly. Now, let's talk about speculation," I leaned forward, "Some say it's just gambling. What do you think?"
He thought for a moment. "Well, gambling is about chance, right? Like betting on a dice roll."
"Good start," I nodded. "Speculation involves risk, no doubt. But unlike gambling, where outcomes are purely random, speculation can be informed by analysis, trends, and economic indicators. You're betting on educated guesses rather than blind luck."
"But isn't it still a bet?" he countered, sharp as ever.
"Indeed, but here's the difference: in speculation, you're not just betting on outcomes; you're betting on your ability to predict those outcomes based on research. It's about managing risk, not just taking it."
I pulled up a Tesla’s chart showing its rapid price move out of consolidation over the past two weeks:
"Look here, when what happened after Tesla’s price advance quickly out of this price congestion area how fast it moved?” How did speculators know how to buy it, why was this the tipping point? I explained that, “Speculators who understood the impact of pricing pushing through this level could profit, not just by chance but by foresight and preplanning."
"So, it's about knowledge and timing?"
"Partially. It's also about psychology, market sentiment, and sometimes, just plain gut feeling. But unlike gambling, where the odds are set against you by the house, here, you can influence your odds with knowledge and strategy."
We paused, reflecting on the concept.
"Remember," I concluded, "the market isn't just about numbers; it's about people, their actions, reactions, and the narratives they weave around companies and economies. Understanding these players and their motivations gives you an edge."
As we turned back to the charts, “Keep observing, keep learning, and always question why. That's how you turn speculation into something far greater than gambling."
Until next week, stay curious, and may stocks move in your favor.
Cheers,
Disclaimers
“Not Investment Advice Disclaimer”
The content covered in this blog is NOT to be considered as investment advice. I'm NOT a financial adviser. These are only my own personal and speculative opinions, ideas, theories, hypotheses, charts, technical analysis (TA), insights, curated news publications, and price prediction(s).
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The Speculator’s Journal may contain links to affiliate websites, which means we receive an affiliate commission for any purchases made by you on the affiliate website using such links. Affiliate commissions will be used to fund a trading account for my son.
Good read!