With casinos in Singapore raking in more money than the whole of Las Vegas, it’s clear we Asians have a penchant for gambling. Unfortunately, there’s another much more subliminal system that is very much alike these dens of sin. The Motley Fool offers some perspective on why the stock market could possibly be the world’s largest casino:
Many of us would have heard of the classic adage: “The stock market is the biggest casino in the world.” Indeed, some “investors” buy shares just because their prices have been rising feverishly for a while or because a well-informed taxi driver had relayed a stock tip from his trusted broker friend.
But how true is the title of this article? Is the stock market really a place to gamble? In fact, what is gambling or speculation in the first place?
What goes up can only go higher?
In their 1934 investing classic “Security Analysis”, Benjamin Graham and David Dodd defined what speculation is:
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
A classic example of speculation in the share market took place in Singapore last year with the trio of Asiasons Capital Limited (SGX: 5ET), Blumont Group Ltd (SGX: A33), and LionGold Corp Ltd (SGX: A78). On 4 October 2013, around S$5.2 billion in market value was collectively wiped off the three firms. Prior to their fall from grace, they had gained manifold in price in very short spans of time and were carrying very high valuations – Blumont takes the cake as it was valued at an astronomical 500 times its trailing earnings shortly before it collapsed.
Sadly, market participants who bought these shares and who were caught in the downdraft had to personally experience what Warren Buffett meant when he said that “only when the tide goes out do you discover who’s been swimming naked.”
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Easy does it
Take another example in the form of Sarine Technologies Ltd (SGX: U77), an outfit involved in diamond testing and evaluation. If someone bought the share solely because of its price rising – Sarine’s shares have doubled in price over the past 12 months – then he would be speculating at best.
If, however, the same person had researched Sarine thoroughly – by delving into its competitive advantages, financial history, management’s integrity and competence, and valuation etc. – and had only bought the share when he deemed it to be undervalued, then he is not speculating.
Investors who have been following the company for a few years now would know how the firm has been trying to widen its economic moat and create more long-term value for its shareholders. A speculator may not know this and may panic and sell if and when the company stumbles over a quarter or two.
Business, business, business
Market participants have to realise that behind every ticker symbol is a business. When buying a share, you are also buying all the underlying brands, products, know-how, technologies, patents, physical assets, management, and so on. When you buy shares, you become owners of a business and not merely owners of a ticker symbol.
By thoroughly researching a business and buying only when its intrinsic value is higher than its share price, you tilt the odds of success in your favour. No one can guarantee that an investment will make money. But when the odds are advantageous for you, you’d end up in a situation which Mohnish Pabrai, an Indian-American investor, likes to call “heads you win, tails you don’t lose much.”
The share market is here to serve us and not to instruct us. It is not a gambling table in which we can make a fortune overnight (Rome wasn’t built in a day, remember?).
Jesse Livermore, an infamous speculator in the early 20th century (Livermore won and lost several fortunes in his lifetime before committing suicide), once opined:
“Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.”
Instead of gambling, you can increase your chances of success by focusing on the business fundamentals of a share. After all, that’s how superinvestors like Warren Buffett, Walter Schloss ,and Tom Knapp made their fortunes in their investing careers – they had looked at their investments through the eyes of a business owner.
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