Investing or Gambling?

Years ago, when buying stocks, the pattern of many people was to carefully pick a target industry in which to invest, and then equally carefully pick companies within that industry that were growing or seemed poised to grow at rates faster than the general market. With this system, through the years, people made a few killings, and had a few losses, but overall created a steady and good return on their investments. Later, in managing a small 401k investment sthe process was the same, this time picking funds that were in target industries and that performed better than other funds in those industries. SGenerally the returns were better than double stock market indices growth rates. Buying in, and selling out of stocks, or more succinctly, TIMING was the key.

Some people pto them that this was not investing, it was gambling. Short selling seemed to be about the same thing; making a bet that a stock would go down, and making money when it did. It was also gambling. Sure, careful study preceded these investments, but because of the limited time period for them, it required selling on a schedule, not like longer term investments. Sometimes the timing was not favorable.

Day trading requires almost constant attention to the market, a luxury not available to most people.

Fortunately, most people did not become involved in the real estate bubble, although many did. In Phoenix, for example, there were plenty of opportunities. Property values in some areas increased 50%, or doubled, or in some cases even tripled in a year. The question was, “had the properties risen in value by the same amount as the increase in price?” It did not seem so. The great bulk of properties could earn only slightly greater rent because of higher property prices. It was apparent that properties were overvalued. (Some of this is 20/20 foresight, and some is 20/20 hindsight.)

For example, an investment group bought a nearby apartment complex with 270 units, and announced they would convert the units to condominiums. Tenants could buy their apartments at favorable prices, and a few did. After refurbishing the complex the new owners sold, in a little over two weeks, the remaining 200 or so units. Investors, not prospective tenants, bought the bulk of the condominiums. They gambled, and for the most part, they lost when the real estate bubble burst.

The same is so with most of the gamblers who expected great gains when they bought asset backed securities (derivatives), hedge funds, and other such paper instruments about which most people know nothing, or sold short, or bet on commodities, etc. In other words, they did not invest into value; they invested in paper assets. Underlying assumptions and the tacit assumptions behind them were either not investigated or ignored. Many of those paper assets disappeared, in many respects causing the mess our financial system, and our economy are in.

Here are some questions to consider. Readers say they appreciate your comments….

First, is there more benefit to the economy by investing in productive assets, such as operating companies, rather than investing into paper assets? Second, do the high-risk instruments and investments benefit our economy? Third, should we consider limiting or banning investments in paper assets and other high-risk methods of investing in the financial system?