Investing I - Gambling: not an Investment Strategy

Like most everyone, I have my dream of what I will do someday when my ship comes in. When I win the lottery. When I find that stock that's goes through the roof. When a hermit uncle that I never knew existed dies and leaves me several million dollars for no readily apparent reason. When I invent something simple that everyone wants and needs. When I write the great 21st-century novel and Hollywood throws money at me for the film rights. When I strike it rich at the casino...

What I find interesting is that we all have these dreams.

Some people with these dreams are busy actively pursuing them. They're writing their novels. They're inventing their gizmos. They're trying out for American Idol.

Me? I'm investing.

Mostly I'm investing in my house. I own my own home. It's in a relatively urban area, so the property values aren't declining like they are in the suburbs. I'm doing okay.

Real Estate - Real Estate in which I live - has been good to me.

And really, I'm just saying to you what any investment advisor would say:

• Work to get out of debt, especially credit card debt.
• When you've paid your credit cards off then put some money - several months worth of living expenses - into savings.
• Buy a home (and pay it off as quickly as you comfortably can).
• Start a retirement account.

Well, see, I've done all those things. And the economic advisors are right. These are the right things to do, absolutely.

But then what? What do we do to attain our unreasonable dreams of wealth?

Well, I'm not writing my novel. Nor am I trying out for Idol anytime soon. Instead I'm investing.

Here's the point where other authors tell you how they struck it rich on the stock market and you can too! Just follow these simple rules!

No. Because I haven't struck it rich on the stock market, and I may never strike it rich.

And you don't have to buy my book to learn what I've learned. This blog is free to all to read.

But when I write about investing then that's what I'll be telling you: What I've learned so far.

So what have I learned so far?

Well, first and foremost don't invest any money you can't afford to lose, because you might lose it. Make sure you've taken care of the bullet-points above, and are continuing to take care of the bullet-points above, before you invest any additional money anywhere else.

Second, the lottery is a losing investment. Duh. I mean, this is not a revelation.

That being said, I do play the lottery a little. It's stupid, I know. The lottery is a tax on people who are bad at math or are overly optimistic.

Well, I'm pretty good at math. I play the lottery because - you guessed it - I'm overly optimistic, and because I actively engage in a certain amount of magical thinking: If I play the lottery and lose then maybe I'll be lucky in other parts of my life.

And it appears to be working. I seem to be lucky in all the ways that matter. I'm not rich but I'm happy, and that's what matters. Enough is as good as a feast.

Still, let's dispense with magical thinking for a moment and look at the lottery with the semi-critical eye of one who plays it. From my experience, I can tell you this: I have lost more money than I have won on the lottery.

That's okay, because I've stuck to my first rule of investing; Don't invest any money you can't afford to lose (which is good because I've lost almost all of it).

When you invest in the lottery, you're almost certainly not going to benefit from it monetarily. May it bring you joy in other ways, but I can pretty much guarantee you it will not bring you riches.

It brings me some kind of joy when I lose, because of the magical thinking of which I've spoken. Also, there's a kind of anticipation at finding out the results of the next drawing. There's always the very minor possibility that I might win this time. A feeling that maybe today is the day! And then I pull up the lottery's website and see that, in fact, today is not the day. But that's okay, too.

If you think of the lottery as an entertainment experience - like going to a movie, say - and you get some kind of enjoyment out of the experience then good for you. Stick to the first rule of investing, though. Don't spend money you can't afford to spend.

The same thing goes for horse-racing, casinos, poker tournaments, etc. In all of these situations the odds are against you, and when you lose you will have nothing to show for it. As long as it's all money from your entertainment budget and not from your retirement or your kids' college fund then you're fine. Gambling can be an entertaining and enjoyable activity, but it's not an investment strategy.

The stock market is different. Theoretically when you invest in a stock then you're investing in something real. Even if it turns out to be a losing bet - let's say the stock you buy loses 50% of it's value - then you still have something to show for your money. In the case I just mentioned you can sell the stock and still have 50% of the money with which you started. That's not great, but it's infinitely more money than you'll walk away with if you lose at the lottery, at the track, at the casino...

So we'll talk about the stock market. Next time.