In many ways, the difference between investment and gambling is like the fable of the ant and the grasshopper. Investing is putting your money to work like ants, working hard and storing up what you will need for the winter. Gambling is using your money like grasshoppers, enjoying the sunny summer without thought of rain or winter. It works, so long as it is perpetual summer. The current wintry climate of the real estate market demonstrates that having your money work like ants might be better in the long term.
We all make investments, if not in the financial markets. We invest time into a relationship or community. If you garden, you put work, water, and money into the garden and, usually, get lovely flowers and vegetables as your return. We invest time, money and work into our education. These investments give returns. Family and companionship may be the rewards of investing in a relationship or community. Fresh flowers and the beauty of our garden reward the efforts of gardening. A more rewarding career, possibly with a better salary, rewards investments in education. These are long-term investments, and the returns are not always immediate, consistent, or as expected. Moreover, not everyone wants the same rewards. Some people don't like weeding more than they like flowers, for a simple example.
So it is with investing in financial markets. The investing takes work, time, money, and the rewards are not always immediate or consistent. It takes time and a long view to reap the full rewards. In addition, not every investment and its return suit every investor.
Many of us also gamble. We might buy a lottery ticket, hoping to strike it rich. We might take a chance that we won't run out of gas when the needle is low and we don't have time to stop. Perhaps the gamble is small, like whether someone will be home when you happen to stop by without calling. Sometimes it is larger. Usually, if we lose a gamble we have chosen to risk only what we could afford to lose. It is when we gamble more than we can afford to lose that we get into trouble. The grasshopper of the fable gambled that summer would stay, and risked starving when winter did, as it had eaten all the food while the sun shone, and stored none.
In the world of personal finance, day traders, short-term investors, and those hoping to catch the latest financial wave gamble with their money. If they have the money, the nerve, and the wits to survive, they might do well on a particular day, or even on most days. Real investing, however, requires a long-term strategy and analysis of potential gain versus costs. Investing usually entails reducing your risk of loss as much as possible, while increasing your chances of gain. The ant of the fable stores food during the summer, working hard, so that when winter comes, it can eat.
If short-term investing in hope of quick profits might be viewed as a poker game, long-term investment can be thought of as a chess game. In the poker game you take chances, move quickly, and rely a lot on the luck of the draw. You bluff and hide your cards. In chess, all the players are on the board in front of you, but you look beyond the board. You analyze your moves several steps ahead, anticipate your opponent's moves, and take calculated risks, including short-term losses in exchange for long-term gain. When poker players lose, they lose. When they win, they win. A chess player might lose a battle, sacrificing a piece on the board, even a valuable one, in order to win the war, moving into position to take the most valuable prize, the king (checkmate).
The investment gambler, like the poker player, cares little for value, looking only at the rise and fall of the stock price. A long-term investor, like the chess player, looks beyond the board as it is now, beyond immediate profits from a rising stock price, to long-term value. The investor is willing to sacrifice stock price today to allow investment in company infrastructure (including personnel) that will return value in stock income and price tomorrow.
Investments thus require a strategy. You need, like the ant, to figure out what you need and want from them: income or growth, fluidity (how easy it is to get cash for them) or savings (perhaps you need it to be difficult to get the cash out) or, most likely, some mixture of these and other benefits. Do you want your investment to supplement your salary? Do you want it for future expenses? Will you want the return for a child's education? Will you want it available for a "rainy day," such as an unexpected illness or layoff? Is your investment for retirement?
When the hard times come, you need to assess whether to use or hold onto your investment. On a cold rainy day, the ant does not necessarily decide it's winter and eat all of the gathered food. Sometimes, you wait. Again, looking at today's real estate market, many are wringing their hands and panicked about the loss of the financial value in the homes or other real estate. Yet, in the long-term the market should return to reasonable values.
Some of these people gambled that the market would continue to skyrocket, and they might have lost this one. Others haven't thought through their investment strategy. Those who are calmer invested with a long-term strategy, looking at their return (and with your home, the return is not all financial: there are security, community, comfort, emotional and other intangible returns on a home versus a purely financial real estate investment).
Gamblers only want one thing: more money as soon as possible. They risk losing what they have, and may or may not benefit from the risk. Investors, however, take the time to plan how their money will benefit them in the long term, what their needs are, and what they dream about. Investors want more value that serves their purposes.