In this article, I am going to show you the different between buying a stock, and what most people do(most likely including you), speculating.
One day, in your company's cafeteria, you overhear John was talking about stocks with another co-worker, and how he made a couple of thousands of dollars in the stock market. He is the financial analyst for our business team.
As a professional, your pay is okay, but living in the city is expensive. At the end of the month, when you paid all your bills, there is hardly anything left to save. You struggled for many months, but you finally saved around $10,000.
You are interested in making a few extra buck on the side, and you joined the conversation.
They're talking about a company called ABC Inc, and how he saw the opportunity when the company rolled out a highly desirable electric car. He invested immediately, and made some money when the stock reacted to the news of the debut of the electric car.
Not knowing much about stocks, or how the stock market actually works, you are afraid you might lose money in the stock market. Knowing the stock market's reputation, you have a high probability of losing the money; However, the chance of making a large profit overcome your fear.
You started investing with your $10,000...
You look for news like ABC Inc, and you try to replicate John's result. Ten minutes later, you found the stock that matches ABC Inc's profile, and invested your $10,000.
You sir or madam, are now a speculator...
For the masses, they have no understanding between a true investor and a speculator.
I remember back in March of 2020 after the stock market crashed due to COVID-19, my father asked me a question that I still remember now.
He was curious how I was doing, and said: "I heard from your brother that you have bought some stocks, did you win any money?"
I smiled at the time, but I was sadden by his question. Not because I loss money in the market(which I didn't), it's because of his misunderstanding of stocks.
He asked if I have "WIN" any money, just like someone would ask you when you have returned from a trip to the casino. At that point, I felt sad because you don't win money from a stock...
From my father's perspective, stocks is no different from the casino. You bet either Long or short, and the stock exchange is the dealer that tells you either you win or lose.
Although I don't agree with my father's perspective, but seeing the stock exchange as a large casino is a social norm to most of us.
If we're mistaken when we said stocks are like gambling, please enlighten us with your other worldly wisdom.
Stocks is no different than most businesses... You buy low, and sell high...
Imagine you are a merchant of ancient Rome, your name is Anthony, and you have some money, 140 Silver Denarii to be exact. How do you make more money with the money you have?
Anthony was born in Rome, and his wife Cassia was from Carthage(a city south of Rome). They travels to Carthage once a year to visit his father-in-law, and he noticed something very interesting.
When they have dinner together, he noticed that he was given very little olive oil for his bread, and knowing his father-in-law as a generous man, that made him very curious...
Although his father-in-law was not wealthy, but he is considered a middle class citizen working for the city government. With his salary, he should be able to afford olive oil.
The next day, Anthony decided to go for a walk in the marketplace, and when he arrived at the olive oil merchant, he was shocked...
46 Silver Denarii for one Jar! That, is outrageous, Rome was selling for 20! Anthony said to himself.
Later, when Anthony talks to his father-in-law, he finds out that the oil merchant only receive supply from other cities once a month. Being a city without proper soil to grow olives, there were always a shortage on oil, and that's the reason oil price was high.
Seeing this as a great opportunity, Anthony returned to Rome and beginning to plan his enterprise...
He purchased 6 large Jars of oil for 120 Silver Denarii, and then he paid the captain of the ship 20 Silver Denarii to carry the oils to Carthage. Spending all 140 SD...
Upon arrival, he begin to sell those oils in the marketplace for 45 SD each. Within 15 minute, all his oil was sold, and now he have 270 SD.
The story did not end here...
With 270 SD, he can now purchase 12 jars of oil. Actually 13 jars, because his large volume purchase, he was able to negotiate an extra jar for free.
As soon as his olive oil lands, they were sold... Now, he have 585 SD.
Because the distance between Rome and Carthage was far, he can only make the trip once a month. With Carthage always in short supply, his oil were always sold upon arrival.
After exactly one year, . He now owns 2,400,000 Silver Denarii... A very rich man...
Now, back to my father's question. Did Anthony WIN all his money? or would you say that he earn his money honestly?
Would you feel a little sad if your family said Anthony WON money?
In any merchandise business, you buy a product at a lower price, let's say $5, and it actually worth $7; and then you sell it to a customer for $7. You make $2 profit. That is usually how merchandise business make money.
In stocks... we find a company that is worth $7. We wait until a company is at a discount, let's say $5, we purchase the stock, and we patiently wait until it's market price return to $7 and sell it, and make $2 profit...
Can you tell me the difference? I couldn't...
In life, we often see things on the surface level and we don't see the essence of things.
On the surface, stock trading is really no different than gambling. There is a lot of uncertainty, you can't tell when it will become bullish, or bearish.
You don't know when the economic crisis will come and sweep away all your money.
If you understand "Value Investing", the mystery of stocks will open up to you.
You'll no longer speculate on the daily gains or losses of each stocks you purchase, and you simply "Know" with great certainty, your portfolio will make money. It is a matter of "When"...
For your reference only...