Get Lucky with Investments

Updated: Nov 12, 2020

Investing in stock market is similar to gambling in the sense that they both provide an illusion that betting money in either is the shortest and simplest way to wealth and riches. Many people believe that both stock markets and gambling carry uncertainty, and success in either depends largely on luck and guessing. So, the question arises: Is investing in stock markers really like gambling?

Instant gratification is the devil and if you fall into the temptation of trying to make a quick buck, more often than not you are going to end up losing. Patience is one of the key components of becoming wealthy in the stock market. Before investing in a stock, a good investor would do his/her research about the company, research about the company’s balance sheet with their assets, liabilities, revenue throughout the years, and evaluating how they handle their money. Investing is about being patient and seeking consistent returns over the long-term. Ups in downs either in the stock itself or in the overall market should not change the investor’s strategy because the real payoff is spread out over many years.

Speculators who follow an in-and-out strategy, seek immediate returns, focus on the short term, betting on the trend rather the stock, play on price appreciation rather than building cash flows are the ones who, in the general sense of the word, gamble with their money in the stock markets. Though this strategy works for some people, it may not work for everyone.

So in conclusion, if you put money in stocks after doing your homework and understanding the fundamental thesis the stocks represent, you are investing not gambling. If you put money in stocks without any research, either fundamental or technical, don’t have any strategy but just play on gut instinct, then you are gambling not investing.

In the real world, in other words, the distribution of wealth at the highest end of the scale is quite consistent with pure luck.

Or is it? The obvious objection, of course, is that the coin-flip investment game is a gross oversimplification of reality. For example, it takes no account of consumption—the money that rich people siphon out of the market to spend on travel, penthouses, yachts, or whatever. Nor does it allow for the fact that some people are born with inherited wealth that gives them a huge head start in life. Yet it turns out that neither consumption nor inherited advantages make much of a difference: Even when the model is adjusted to allow for such factors, Pareto still rules. Another possible objection is that it may take a very long time for the wealth distribution to converge to its steady state. However, it has been shown both numerically and experimentally that the convergence to the Pareto wealth distribution is actually quite fast.

What might make a difference, however, is talent—Steve Jobs-scale abilities that allow some players to beat the odds and do better than others. There is no room for talent in the original version of the investment game, because it assumes that the only source of inequality is pure luck. That’s the whole point of the coin flip. And in truth, talent is an intrinsically hard thing to model: If we knew how to come up with strokes of genius like the iPhone, everyone would be doing it.

Still, it is possible to get a crude sense of the effect of talent by modifying the investment game to include two types of players. Normal investors are just like those in the first game: They flip a coin with heads yielding a return of 30 percent, and tails producing a loss of 10 percent. But the talented investors are more skilled at playing the market: They earn slightly more than 30 percent when the coin comes up heads, and lose slightly less than 10 percent when the coin comes up tails. Now we set the players loose and ask an empirical question: How big can this “talent differential” be and still stay statistically consistent with the power law wealth distribution we see in the real world?

It turns out that it can’t be more than about 1 percent. A larger talent differential would produce a wealth distribution that is even more extreme than the real one, and that would not follow a power law.

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hey everyone there's a growing problem on youtube and we need to talk about it we see it all the time these youtube thumbnails that are saying buy this penny stock or this stock is about to 10x