Gambler, Saver, or Investor ?

Are you a Gambler, Saver, or Investor?  The answer to that question is important yet a surprising number of people who participate in financial markets do not even know appropriate descriptions for each title.

A Gambler is someone who seeks to “make money” by placing “bets” based on speculation that their “guess” about the future is accurate. A Saver is someone who seeks to accumulate financial assets by spending less than their current income in order to fund future spending. A Saver expects that their financial assets will decline whenever they stop accumulating and begin spending more than their current income in the future. An Investor accumulates financial assets with the expectation that those assets will provide a future and rising income.

One complication is that sometimes Savers engage in gambling and sometimes Investors engage in the process of saving.  But, most people have a “preferred mindset” concerning money that defines them as being primarily a Gambler, Saver or Investor.

The study of Economics is really a social science studying aspects of human behavior.  And as an Economist, I believe that it is important for people to have an understanding of their “preferred mindset” concerning their activity as it relates to financial markets.  This “preferred mindset” will determine their emotional reaction to market fluctuation.

Keep in mind, market participants at any time include Gamblers, Savers and Investors.  Savers may not be directly participating, but since most Savers use bank accounts or insurance company products, they indirectly participate in markets through the activities of these intermediaries.  

When markets are rising, Gamblers are generally happy as most of their bets are winners. In addition, rising markets in a low interest rate environment attracts Savers seeking a higher rate of return.  Prolonged periods of rising market prices tend to generate overconfidence on the part of Gamblers and Savers.  They forget the Fundamental Law of Markets is that market prices fluctuate--UP and DOWN.

When markets decline and Gamblers begin to incur losses, they tend to try to protect their gains by “locking in” and selling.  When markets decline and Savers begin to incur losses, they tend to fear that the “climate has changed” and that the only place for “safety” is with bank deposits or insurance company products.

Investors see market declines from a different perspective.  For the same reason that people prefer good weather over bad weather—sunny days are generally more pleasant than rainy, stormy ones; Investors prefer rising markets.  What makes Investors different is that they understand that downward market fluctuations are “normal and necessary” and really are opportunities that improve the Investor’s chance of meeting their goal of future and rising income.  Investors are always potential buyers and buyers are always looking for a low price. 

Investors know that even when they are “taking income” for example while in retirement that some of their dividends will need to be “reinvested” requiring them to be buyers on almost a continuous basis.

I make no judgments as to the one title or activity being better or more  noble. There are many successful and rich Gamblers. (Although there are probably more Gamblers who lose than win.) And, if you can save enough that your future income requirements will be met, despite inflation; being a Saver provides a certain emotional comfort.  However, few can save enough to meet those future income requirements, inflation considered.

Savers  tend to seek “certainty”.  Yet funding “retirement” with a fixed savings program does not provide the “certainty” they seek.  Retirement comes with many uncertainties:  A) Lifespan; B) Income requirements given uncertain health---medical and long term care expenses; and C) Inflation.

Investors accept the reality and necessity of market fluctuation.  They realize that the present uncertainty of daily “market price” is more than offset by the probability of rising future income from “investing”. By being owners of a highly diversified portfolio of businesses they improve their chances of dealing with the future uncertainties of inflation and unknown living expenses.

It has been said that you can tell whether you are a Gambler, Saver or Investor by their emotional reaction to market fluctuations like we have seen during July-October 2014.  If the market fluctuations during the week of October 6, 2014 caused you to contemplate major liquidation so you can buy back later at a lower price, then you are probably a Gambler. If they made you feel uncomfortable, thinking that perhaps you should sell your investments and just put the money in the bank, then perhaps you are a Saver. If the recent fluctuation caused you to start thinking about what you might buy with cash you have been accumulating, then you are an Investor.

Remember that there is a big difference between those that predict market direction versus those that predict the timing of market direction.  If you think you can predict the timing of market direction, you are a Gambler. On the other hand, History has taught Investors to trust that the market direction for a portfolio of quality diversified portfolio of businesses is generally up over the "long term" of more than five year time horizons.

So, to an Investor, market fluctuations are seen as either a buying opportunity or simply the “cost of doing business”.  Everyone should be a Saver with some of their money, but for many people, being an Investor is the best way to prepare for the future.

If you are a Gambler, all I can say is “Good Luck” since I have no idea what markets are going to do tomorrow, next week, or next month. If you are a Saver, I suggest that you are underestimating the very real uncertainties of Lifespan, Health and Inflation---and suggest that you need much higher savings than you probably have accumulated---or you need to learn how to be an Investor.  As an Investor, I can say that as prices for good quality companies fall, they become increasingly more attractive to buy—hence the probability of you reaching your future income goals actually go up.

One important thing to note.  Increased use of computer software seems to have emboldened Gamblers to make bigger and bigger “bets”. This leads to the potential for an increased level of volatility and makes the market very dangerous for the small time Gambler. (On some days as much as 60% of the market volume is from Gamblers.)  It also makes the market very uncomfortable and perhaps inappropriate for the Saver.  For the Investor with the right patient and disciplined approach, this high volatility potentially creates substantially increased opportunity.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.