Saturday, July 25, 2015

Stock Market Lottery

When something can be used as a lottery game, there always will be people who use it as a lottery game. Like 90% of all people using it.

The stock market is definitely a place full of lotteries. Penny stocks, hot stocks, options, high-leverage trades. When you're entering a trade, how can you tell if you're not playing a lottery? Your inner demons like to play lotteries because it's fun. You can get rich quick, who can resist? It doesn't matter if numbers are not in your favor, all that matters is that you CAN.

Let's try to understand the difference between investing and playing a lottery.

What do you try to optimize when investing? You definitely want to get rich eventually, but most of all you want to secure your returns on a long-term time-frame. Really long-term one, like 20+ years. You don't want to be poor when you're old, that totally sucks.

And what problem do you solve playing a lottery? You want to get super nice returns in a short-term future.

So here's the difference between investing and playing a lottery - the planning time-frame and the speed of the process. Lotteries are quick, promising and they don't really care about you future (and they are fun).

You may think that getting rich quick also solve your long-term problem, but this is just an illusion. You only have a chance to get rich, that doesn't mean you have a positive expectation of it to happen. And in most lottery games this expectation is not in your favor. You pay for this chance and usually you pay a lot.

Speaking mathematically, when investing you're optimizing your long-term rate of return and chances to have it positive at some point in future. When playing a lottery you're maximizing the probability of high return in a closest timeframe (that is no fun when a time-frame is too long). These problems are quite different and so are the solutions. And almost always having fun with lotteries goes against your long-term interests. That's why entering a trade you have to fully understand what problem do you really solve.

When you have an idea to make money quick, that's probably your inner demons trying to tempt you into playing some kind of lottery. If you've got this idea from media, that is most definitely a lottery. People usually don't get emotional about the investment process, because it's boring. But they do get emotional about lotteries - because it's fun! And those emotions are quite contagious. The media are full of them. The media want you to get emotional, that is their business.

If you are long-term oriented, you should avoid playing lotteries, because this is usually a quite expensive sort of entertainment, especially on the stock market. No fun, no get-rich-quick trades, boring long-term stuff only. If you're not bored enough, your future may be in danger.

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