Gamblers, Speculators, and Investors

Deep down, there is not much separating gambling and investing.  There are 3 levels I would separate them to.  

1. Gambling:  short term bets:  sports betting, casino games like slot machines, blackjack, poker, roulette, craps, etc.  

Most forms of gambling are pure luck, but there is skill involved in poker, blackjack, and sports betting.  The outcome of most bets happen quickly, so they attract the impatient and thrill seekers.  A negative stigma attached to gamblers, even professional gamblers.  Not many people look up to successful blackjack players or sports bettors.  I guess some people look up to successful poker players in the past 20 years due to the poker boom showing up on TV and youtube, but not really a respected profession among the general population. 

2. Speculating:  short to intermediate term bets on stocks, options, futures, bitcoin & cryptos, FX, and other alternative assets.

This is the bridge between gambling and investing.  There are speculators that are like gamblers and there are speculators that are like investors.  This is the most crowded space in the financial community.  This is where the action is.  This is where the money is made and the blood is spilled.  The biggest group of speculators that move markets are hedge fund managers that need to keep up with the averages, that can't afford to have several down months in a row, that can't afford to think in the really long term.  Leads to some irrational price movements from stop losses and forced risk reduction.  I would argue that prices are made by speculators who move in and out regularly, not by long term investors.  If you want to win, you have to know what these guys are thinking and be one step ahead, predicting their next move. 

Choosing the right products and stocks to trade is also an edge.   So is choosing the right time frame where there is the least competition or the softest competition.   

In the markets, the shorter the time frame, the more competitive it gets and the harder it is to have an edge.  I know that if I try to scalp SPX against the HFTs, I'll probably lose.  But if I take the other side of swing trades over 3 to 5 days in pump and dumps traded heavily by greedy retail traders, I have a big edge and will win in the long run.  

With the really long term time frames, valuations usually merge much closer to long term fundamentals, which are much easier to analyze and predict than investor psychology during a bubble.  For example, I have no idea what TSLA will do in the next hour or the next week, but over the next 5 years, just based on fundamentals, I have a lot of conviction that it will be much lower in price.  This is not just TSLA.  Considering how much flotsam has bubbled up in the past 12 months based off of ESG hype, bitcoin hype, biotech hype, I can name probably another 200+ tickers that would go down as much if not more than TSLA over the next 5 years. 

3. Investing:  long term bets on stocks, bonds, real estate, and alternative assets.  

There is a big edge in having a longer time frame than those that are price makers (e.g., hedge funds, short term traders, trend followers).   But there is a caveat.  You can't be leveraged.  You have to be able to withstand big drawdowns.  The market can stay irrational longer than you can stay solvent IF you are leveraged.  If you aren't leveraged, then you can stay solvent regardless of where the prices go in the short term.  

There is a reason why the top of the world's richest are investors not speculators.  That's why Buffett is richer than Soros or all the other hedge fund managers out there who charge exorbitant fees and still can't amass more money than Buffett.  

But in some cases, its better to not be a long term investor.  Like 1999 or 2000.  Like now.  When you are in a raging bubble, and you decided to invest for the long term, that is asking for trouble.  Not all stock markets have been as bullish as the US during its history.  Look at China, Japan, Europe, and some of the emerging markets.  The stock market doesn't guarantee good returns like many believe.  A lot of the SPX outperformance vs global equities is due to corporate welfare in the US. Don't confuse brains with a bull market.

The SPX continues with the low volatility grind higher.  But both bonds and industrial commodities weakening lately.  It feels like a shoe is going to drop at anytime.  Would much rather be in bonds than stocks here.