Gambling and investing share many characteristics - both are games of chance where you put capital at risk, and both operate on probabilities. However, there is one critical difference that separates gambling from investing. With gambling the odds are predetermined and stacked against you, but with investing you determine the odds by choosing which risks to accept and which risks to reject.
This is equivalent to playing poker and not having to ante-up until after you see the cards. Just imagine the advantage of only betting on winning hands. It cannot be overstated.
In a new article located at http://financialmentor.com/free-articles/investment-advice/alternative-investment-strategy/gambling-vs-investing I fully examine the differences between gambling and investing to illustrate the essential concept of “mathematical expectation”. This concept sounds intimidating but is actually quite simple to understand. Even if you don’t like math it is well worth learning because it teaches you how to invest only when the odds are overwhelmingly in your favor. The net effect can be more consistent investment returns and greater profit.
How does it work? Briefly explained, expectation is equal to probability times payoff – the probability that your investment is a winner or loser multiplied by how much it gains or loses. The rule is simple: investors only risk money on positive expectancy situations and gamblers risk money on negative or unknown expectancies. The sad truth is most investors are really gamblers because they don’t have the foggiest clue what the expectancy is for their investments.
What about you? Do you know your expectancy? Are you a gambler or an investor?
If your objective from investing is to earn a profit then this is one lesson you can’t do without. Read the full article at the link above so that you can learn how to improve the performance of your investment strategy.
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