2023.10.31
1.3 Distinguishing between investment, speculation and gambling
I believe everyone is familiar with the concepts of investment, speculation and gambling. In the financial market, these three things are not completely opposite in concept, but three points on the same coordinate axis. Their boundaries sometimes become blurred and ambiguous, making it difficult for investors who are new to the market to identify them, making them confused and misguided, and eventually causing serious losses.
Let's take an example. For example, if the same full position 3x leverage contract transaction is betting on the short-term upward movement of Bitcoin at 2wu, it may be a speculative transaction with a relatively good profit and loss if there are technical reasons for bullishness and reasonable and scientific stop loss. But if there is a sudden market news that changes the fundamentals and hits the price to 1.9wu, you just withdrew the stop loss, and frequently covered the position before the decline stopped in an attempt to lower the cost. The more you cover, the lower the price will be. In the process of covering the position, the three times leverage is increased to 20 times. This speculative transaction has become a gamble. If the same 3x long position of 2wu is suddenly driven to 3wu by a piece of news, hitting your cost area, you find that the full position has more than doubled, and there is no sign of the upward trend stopping. At this time, you cancel the stop profit, move up a wave of stop loss, and prepare to hold it for a long time. Looking back a few months later, you find that you have copied the bottom. At this time, this speculative transaction has turned into an investment. To give another example, Zhang San bought all of Bitcoin in 2wu spot, which looked like a healthy investment with low-level spot layout and no leverage. However, Zhang San's actual source of funds was loans + online loans. At this point, everyone can see that the coordinate axis has tilted again, and the nature of this transaction has obviously become gambling.
In the above two examples, the reason why a speculative transaction turns into investment or gambling is not simply a matter of willingness to gamble and accept defeat, or winners and losers, but the result of a mixture of many factors. Even if a gambling transaction with 100x leverage brings super high profits, its nature still cannot be changed from gambling to speculation or investment. There are many factors that can affect this axis, including on-site leverage, off-site liabilities, target selection, stop-profit and stop-loss, and even whether the mood is impulsive. Overall, the axis of investment, speculation and gambling is generally positively correlated with the risk taken. Transactions that are desperate must be more inclined to gambling, and transactions that allow you to sleep peacefully for a few days are obviously more inclined to investment. Although everyone has a mobile phone, a K-line, a green button and a red button in front of them, the change of mentality obviously has a significant impact on the transaction results. In the long run, people who gamble everything rarely have good results, so we must develop correct and healthy investment habits and be responsible for our own capital.
Before opening each order, during holding, during each big fluctuation, before closing a position, and when reviewing after closing a position, you should think about what you are doing. Is this speculation or gambling? Will the profit and loss ratio be high or low? Once you get used to this mentality, it will become instinctive, and you don't have to think about it deliberately. Always keep the profit and loss ratio in mind, put a mirror in front of the trading desk, love cleanliness is one aspect, but also look at your own expression more often, observe your state objectively from an external perspective, and often reflect on your own mistakes.
1.3.1 Characteristics of gambling
Next, let's talk about the differences between investment speculation and gambling. First of all, most gambling games run within established rules. After mathematical calculations of the profit and loss ratio, it is not difficult for everyone to find that its expected return is negative. What is expected return? Remember the example of rock-paper-scissors just now? If you win, I will give you 100, and if you lose, you will give me 50. Everyone knows that this is a good deal. The opposite is not worth it. Some games in the casino are that you win and earn 100, and lose 110. You may be lucky once or twice, but you will definitely not leave if you make money. You will continue to play, hoping for a hundred. Over time, you will naturally lose it. And when your position is too large, you may be kicked out after playing a few rounds. This is a transaction with a very poor expected return and profit and loss ratio.
After all, the game we just talked about is an example of our imagination. In reality, there is no such good thing for you. Let's go to the casino to see what real gambling is like. The most deceptive thing in the casino is the slot machine. The casino likes to put it in the most conspicuous place at the door. Let's make an assumption about the actual situation and do the math. Suppose you play once with one dollar, the grand prize win rate is 0.01%, you will get 50 yuan, the winning rate is 5%, you will get 10 yuan, and the small prize is 10% to return the one dollar you play, to keep you stimulated and not let you get numb and feel bored and stop playing. Let's use mathematics to calculate the expected return, 50*0.0001+10*0.05+1*0.1=0.605 yuan, which means that if you play with one dollar, the net loss is less than 40 cents in theory, which means that Jack Ma has 60 million left after playing 100 million. You happened to pass by and saw someone win the 50 yuan. The machine was flashing and everyone was watching. The primitive intuition of human nature made you forget the teachings of your elementary school math teacher and made you think that seeing someone win meant that the probability was not low, so I had to give it a try. When you spent 20 yuan, you happened to draw a 10 yuan. You said, "Oh, look, I spent 1 yuan this time and won 10 yuan, making 9 yuan. If I do it again, I will almost get my money back." You sat there all afternoon and gambled away all the money in your pocket. At dinner time, you found that the free noodles in the casino tasted good. Think about it carefully, isn't the 100x contract very similar to this kind of slot machine?
Go to the casino and calculate the expected return and profit and loss ratio. You will find that most games are not fun. They are all big money for small money. We know that trading is exchanging one resource for another. Calculate the difference in the expected return of gambling. What resource was the disappeared money exchanged for? You used the disappeared money to buy your gambling entertainment consumption experience from the casino, just like you spent money to watch a movie, but this movie was a bit expensive. After the casino collected the money, minus the operating costs such as rent, water, electricity, and labor, it is the profit of the casino shareholders. Then let's make a point. The characteristics of gambling are small profits and big losses, big money for small money, and the difference in expected returns is exchanged for extremely strong mental stimulation and entertainment. So, don't complain if you lose 100x at a high multiple. Just say, did you feel good? If you didn't feel good, why did you have to be so big? Are you trying to scare off your opponent with bluffing? Adults should be responsible for the results of their investment decisions.
1.3.2 What is investment?
In the eyes of the general public, especially outsiders, the elderly, and honest people who work hard, the difference between investment and gambling is very small. From their experience, stock trading and mahjong seem to be similar. Both are back and forth, and nine out of ten gambling losses, so it is better to find a decent job. Next, we will use playing cards as a representative example of gambling to compare the similarities and differences between gambling and investment.
Investing, speculation and gambling have many similarities on the surface. First, you have to have an opinion, and at the same time, someone who has a different opinion from you is your opponent. You are both willing to bet that your own opinion is correct, and the winner will take the money of the loser. This opinion can be that the next card I draw makes my card bigger than yours. It can also be that the stock of new energy vehicles will continue to rise. When playing cards, the person who has a different opinion from you is your opponent. When investing, this person is your opponent.
There are many differences between speculative investment and gambling. First of all, when playing cards, the rules of each game are fixed. Each deck of poker cards has 52 cards + two kings. Each deck of mahjong follows the rules of winning when winning. They are not affected by other factors. In other words, playing cards is a game of gambling that is fully open and repeated under specific rules. There are only two advantages in playing cards, one is luck advantage, and the other is experience advantage. When playing cards, veterans know that after this card is played, it will not be touched again in the same game. As more and more cards are played, you may be able to roughly guess what cards your opponent has. In addition to the uncontrollable luck factor, remembering and counting cards can bring advantages to playing cards. The more cards you play, the more experience you accumulate, the faster and more skilled you are in counting, and veterans have a relative advantage over novices.
Investing is different from gambling. In investing, the rules of the game are not fixed, the number of participants is not fixed, and what happens may be repeated or not repeated regularly or irregularly. In addition, the target of people's investment in the financial market is often a real asset or a company, rather than an abstract concept, such as a three of diamonds. These financial assets operate in the real world and are affected by various factors such as monetary cycles, company performance, changes in industry laws and regulations, news, and changes in supply and demand. There are more influencing factors in the real world than in playing cards, and your well-made trading plan may be disrupted by a breaking news at any time. Therefore, in investing, everyone tries to find certainty in uncertainty, bet on the direction of high profit and loss ratio, and needs to control unexpected risks at all times.
In addition, the expected return of gambling is often negative, and the difference in expected return is fixed to the casino or the opponent, becoming the operating cost and profit of the casino. In the financial market, although you lose money to your opponent, and there are also exchange commissions/stamp duties, in human history, the financial market has followed the productivity improvement brought about by human technological progress, and in general, the pie is getting bigger and bigger. This makes the expected return of the financial market much higher than that of the casino in the long run, and even theoretically there is no cap. For example, Bitcoin has gone from being worthless at the beginning to $1, to several thousand U, 6w9, although there have been many terrible bear markets in the middle, but looking at the overall time period, it has made many people rich on the way from 0U to trillion U, and has also created a new industry and jobs. Not to mention the stock market of traditional industries, while slot machines, poker and mahjong do not have this effect.
Therefore, whether it is investing or gambling, you must try to find transactions with a high profit-loss ratio to do, so as to achieve the goal of making big profits and small losses in the long term, extend your life cycle in the market, and wait for your MVP moment in a favorable situation.
Because the entire gaming environment and game rules are controlled by the casino, and you cannot guarantee that they are not cheating, the expected return is negative in most cases, which is why there is no invincible general in the casino. Even if you find a way to make money in the casino in a long-term and stable manner, the casino can still blacklist you. In the investment market, there are many factors that cause fluctuations in investment targets, including but not limited to demand and supply, regulatory changes, emergencies, geopolitics, and other market shocks. These factors involve many and wide aspects, and no one in the market can completely control all factors that affect price changes. This is also the magic of the financial market, which makes the returns of financial investments have no theoretical upper limit.
Although there are no long-term gambling gods in casinos, we can find many gambling gods who have made money in the global financial market. Always remember why you come to the market, are you here for entertainment or to make money? Go fishing where there are many fish, and feed fish where you can feed them comfortably. This is why we, especially young and impulsive friends, need to invest more, speculate appropriately, gamble less, and calculate the profit and loss ratio when we encounter things if we want to make more money and make money for a long time.