Betting, Trading and Investing
When mistaking one for the other is a cardinal sin...
As an investor in the market, there is often a need to understand and differentiate the decision you are making. The worst thing that can happen (which commonly happen to us) is that we mistake a bet for a trade, a trade for an investment or an investment for a trade.
When we mistake a bet for a trade, we often took on a bet that is too large and did not diversify adequately.
When we mistake a trade for an investment, we often hold too long and resulted in tons of lost opportunities.
When we mistake an investment for a trade, we often sold too early and miss out on hefty gains.
So it is always important to ask if are you betting or trading or investing ?
To get ahead in the game, there is a need to differentiate them.
The idea of gambling will be excluded here as the odds are relatively know.
Let’s try to define what is a bet, trade and investment.
A bet is a belief that the past (recent or not) will happen again or continue to well into the future.
A trade involve taking on some form of risk which entails some form of return in the near future.
An investment involve taking on a position that is going to worth far more in the future than what it is worth today.
When Growth Investing (Compounders) are just Bets!
A lot of people idea of growth investing is to invest in compounders. Since the revenue growth is at 20% - 30% a year, the companies here should grow its problems away.
Just like a dating couple who is facing issues in their relationship, marriage will most likely not be the key to solving their problems.
Growth is never meant to happen for long period of time for competition do exist. Even if it continues, the government will find a way put a stop to it.
When Value Investing (Mean Reversion) are just Bets!
A lot of people idea of value investing had been that the company is cheap and it will be fairly valued in the future thereby implying that there is a reversion to the mean.
Just like the man who is perpetually betting on landing a head in a coin toss without realising that the coin is biased.
Using historical datas, the assumption has been that things will always revert until it doesn’t for a very long time.
When Technical (Pattern Recognition) are just Bets!
The idea of technical analysis is that after looking at a thousand head and shoulder chart, everyone is betting that after the head, the shoulder will come next.
Just like anyone who looks at the sky would been able to make up some thing familiar from the shape of the cloud…
Using charts, technical guys are just betting that things should look the same until it doesn’t.
When Event Driven Bets are actually Trades!
Event Driven (or Special Situation) is when there is market dislocation due to some corporate event.
Various participants reacting to a particular event with varying motivation might create dislocation in the pricing.
Active participants would enter the market to ensure that equilibrium will happen after some time period.
When Trades are actually an Investment or not!
If trades are an investment or not depend on the commission or omission of that trade.
The commission part is that we often treat a trade like an investment when it is winning while treating a trade like a bet when it is losing. The worst is treating a trade like an investment when it does not deserve so.
The omission part is that there is also a good chance that we continue to treat the trade as a trade when it has progressed past beyond just being a trade. The company may have qualities of an investment and should be treated as such.
It is often better to be clear on your thesis when you enter into a position for mistaking a bet for a trade, a trade for an investment and an investment for a trade could all be an expensive exercise.
For us, cryptos, value investing (net-net), growth (compounders) are bets, while commodities, special situations are trades and only companies with forecastable consistent long term growth purchased at value/fair price can be classify as an investment.
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