Gamblers, Speculators, Investors, Traders

What do those terms really mean? I will hazard my own definitions.

A speculator is one who takes unusually high risks in order to make unusually high returns, if he is successful. An investor puts his money into funds or stocks because he understands the business, and believes that it will be successful. A trader buys and sells funds or stocks based on a trading strategy that may or may not have any knowledge of the underlying fundamentals of the stocks or funds.

In all of the above, the terms are subjective. What seems like a high risk or high reward to one person may seem commonplace to another.

Sometimes people say that investors have a longer time frame than traders or speculators. You hear something like “Well, it is down right now, but it is a good investment, and I have been in it for the long term.” When somebody says that, you may translate it to “I have an emotional stake in the company, and could not bear to sell when it began to go down. Now I cannot bear to take my loss.” That sort of thinking is just plain stupidity, of course. The way to make gains in the long term is to avoid losses in the short term.

A trader or speculator cares nothing about the company underlying a stock, whatever he may know about it. It is just something to be bought and sold, like knickknacks and beanie babies.

Now there is an element of gambling in all of this, because there is an element of chance. It is totally false, however, to equate trading stocks and mutual funds with what is done at the casinos in Vegas. The gambler at a casino is playing with the odds against him. When he pulls the lever of the slot machine, the expected value of his winnings is less than the money he puts in. The house takes its cut.

So this gambler is someone who plays with the odds against him for the joy of watching the money move, and for the irrational hope that he will get lucky. In other words, he is just plain stupid. On the one hand, I think this attitude is deplorable, and on the other hand I think that anybody that stupid would be wasting his money anyway. So he might as well help the people of Nevada to have lower taxes than the rest of the country.

But I do not think gambling is just innocent fun. Think what charitable organizations could do with that money! The gamblers, since they are going to lose anyway, could really do the country a service by just giving the money away to charity. Or giving half of it away, and using the rest to buy good books for reading to improve their minds (if they have any).

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