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Gambling Vs. Investing

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After 27 years in the investment business, I can tell you that most folks don’t know the difference between gambling and investing. Indeed, most folks think investing is gambling and I can tell you that, having watched people invest improperly over the years, the way they do it is gambling. The difference between the two is the difference between the Democrats and Republicans over healthcare reform. In other words, they could not be any more different.

All right; let’s start with what gambling is. How many of you have been to Vegas, or Atlantic City or one of the reservations that allow gambling? You put ten bucks down on a black jack table and within a minute or so, you have twenty bucks or nothing. That, my friends, is gambling. High risk; high reward.

There is an element of gambling in speculative stock market investing, but it would be exceedingly rare to lose all of your money in a minute although it can be done. The point is that speculative stock market investing involves shorter time frames with much higher risk because of the nature of the company being invested in or the time frame in which you are willing to wait for a return.

Basically, there are three kinds of money. Safe money is that which cannot be subjected to risk. It’s cash or money market funds; that kind of thing. You can’t lose anything so the return is very small. For example, check out the yield on a money market fund, or a short term CD. The feature of safe money is that you cannot lose.

Growth money can be lost, but if you are prudent, you probably will not lose and most likely, you will gain a return over time. These are things like value stocks; bigger companies that are household names like Coca-Cola or General Electric. If you buy them, and hold them for ten, twenty, thirty years or even longer, chances are you will make some money. They generally pay a dividend while you hold them as well.

The last kind of money is risk money. This is money that can be lost quickly. These are your smaller companies with limited track records and feature smaller floats. Penny stocks would fit this category.

Now, I want you to imagine a triangle. At the bottom is your safe money and maybe it represents 10 percent of your total portfolio. Move higher on the triangle and this is the biggest piece representing maybe 85 percent of your portfolio. This is your growth money. At the top of the triangle is the last 5 percent of your portfolio, which is your risk money.

Now, all an investor needs to do is determine how he or she views the pending investment. Is it a safe, growth or risk play? That answer determines how much money you have available for the play. When it comes to the risk play, you can see that on a hundred thousand dollar portfolio, all you would have at heavy risk is five thousand dollars or 5 percent of the portfolio.

Class dismissed.

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