Thursday, June 21, 2007
Investing vs Speculation vs Gambling
Investing is an attempt to forecast the yield of assets in the market Speculating is an attempt to forecast the psychology of the market Investor is a name given to passive investors Speculation is the name of an active investor >Investment is a name given to a successful speculation Speculation is the name given to a failed investment Investment infers an attempt toward a preservation of capital Speculation infers an attempt toward enhancement of fortune Investment attempts to prevent a lot of money from becoming a little Speculation is an effort to turn a little money into a large fortune Investment gone badly is called a speculation Speculation gone badly is called a gamble Investment involves less risk but is a form of a speculation Speculation involves more risk but is a form of investment Gambling involves the deliberate creation of new risks Speculation involves the assumption of the inevitable risks Uncertainty can describe risk that can be exactly measured >Risk is an uncertainty only when it can be exactly measured Investment or speculation involves immeasurable risk Gambling involves risk with a measurable uncertainty Psychologies of speculation and gambling are indistinguishable Psychology with an appeal to fortune is considered a dangerously addictive habit Financial risk can be uncertainty only with inside information Gmax = R suggests inside information equals the rate of return Law of large numbers is misunderstood by gamblers and investors Investment < speculation < reckless gambling Investment with borrowed money is always speculative Speculation is considered riskier than investment Gamblers create a risk Speculators assume a risk Average Return of investors = Average Return of stock market Subtract one from the other and you get Ave Ret of active investors Active Investor Average gains = Active Investor Average losses Average Return of Passive investors = Average Return of Active Investing is a zero sum - (mgt expenses + brokerage fees + taxes) Prediction of risk = immeasurable certainty = any and all gain Gamblers uncertainty can be measured risk with a positive expectation Investor’s risk has an empirical evidence of positive expectation A bet on stocks shows empirical evidence of a higher average return A bet in an attempt to take advantage of those with less information Favorable bets will be called investing Unfavorable bets constitutes gambling Investing, speculating, and gambling each represent bets that attempt to gain advantage of or take from one another. A positive expectation outcome is proportional to a difference in information. However, money is easily lost with a mathematical advantage due to the randomness of these outcomes. Investing is a positive expectation attempt to gain an empirically evident higher ‘than guaranteed savings’ average return. Speculating is an attempt to defy odds in order to gain an amount greater than the average return of the market. Gambling is an attempt to defy odds of outcomes with negative expectations. Speculating and gambling can have a positive expectation that is proportional to insider or privately held information.