Everybody knows that you’ve got to spend money to make money. In the world of investment, though, it’s perhaps more specific to say that you’ve got to risk money to make money. There’s almost nobody in the world who doesn’t, at one time or another, risk the cash they have for the possibility of more. But when is a risk an “investment” and when is it a “bet”? The answer will vary greatly, depending on who you ask. So, let’s take a closer look at what these terms mean, so you can make better decisions with your money.
The Importance of Personalized Risk Tolerance
Let’s imagine for a moment that you have $1,000, and you wish to put this money to work. You could always slice open your mattress and hide this cash away, but this would accomplish nothing. In fact, due to the effects of inflation, your cash would actually lose buying power over time, leaving you with less wealth as the months and years go by.
There may be no safer place to store money than your mattress, but there’s another kind of danger in letting money lose its value by hoarding it away. From this example, we can see that there’s no way to avoid risk in the ownership of money. If the risk of losing buying power is too great, you’ll have to take on another kind of risk: the risk associated with putting your money to work.
When putting your money to work, you’ve got all kinds of options. For instance, there’s the property market. For gamers, free deposit bonuses and spins with Oddschecker create a low financial barrier to entry. You could buy up some low risk, low-interest government bonds. You could buy a few shares of Tesla. You could even buy 1/6 of a Bitcoin. In a way, each of these activities is a kind of investment. You’re putting the money into a venture, hoping to walk away with more money. But no one would say that all of these financial behaviors have the same amount of risk.
Government bonds are seen as one of the two or three safest forms of investment in the world because the only way they would go unpaid would be if the United States government ceased to exist. Meanwhile, plenty of people have made a bundle in Bitcoin, but no one would say that this investment is a “sure thing”. Every investment has varied levels of risk.
When we can begin to understand how much we, ourselves, as investors can tolerate, we’re beginning to understand the nature of investment. “Tolerate” is an important word in investment. If you have a portfolio of risky stocks, and you find that you can’t sleep well or you’re developing an ulcer, you probably have chosen too much risk for your personality. Other people might be able to have millions in cryptocurrency, and sleep like a baby each night. Risk tolerance is different for every person.
Participating in Investments
But we’re still not to the heart of the issue. There can be investments that are very risky, and bets which don’t have as much risk. What’s the real difference between the two?
The main difference between investing and betting comes down to investor strategy and participation. In short, the better has no influence over the outcome of her bets, while the investor can have a bit of control over the outcome of her investments. Let’s look at a couple of examples.
Gold is seen by many as the ultimate safe investment. This precious metal has been traded as long as humans have been able to mine and mold it. It’s a very finite resource. There’s only so much of it in the ground. It’s useful for hundreds of practical applications. It’s easy to manipulate. It requires difficult human labor to extract more of it into the circulating supply.
However, once you own gold, what can you do with it? Unless you’re a goldsmith, there’s nother you can do to improve your gold. All you can do is wait and hope, much like you’d do at the craps table. There are many factors which influence the price of gold, but chances are, none of these are in your hands. You can’t control whether or not 300,000 tons of gold are discovered in a new mine in California, an event which would decrease price by increasing supply. You can’t control whether or not market hysteria causes everyone to buy gold, decreasing supply and driving up the price.
Still, it’s hard to call owning gold a bet. It’s more accurate to call gold buying “speculation”. When we speculate, we’re making a guess based on limited information. Because we can’t predict the future, we can’t know what the future price of gold will be, but we can speculate that it will be higher (or lower) than it is now, and let this determine whether or not be buy or sell the commodity.
Now, let’s say you buy an old house in a nice neighborhood. You have various carpentry skills, and you work for several months to renovate the bathrooms, lay new hardwood floors, and modernize the exterior landscaping. The money you spend on the house is still a risk, but you have a lot more control over the situation than someone who owns gold. In this way, your house is more than a speculation (speculations being very much like bets). Even though the housing market may present more risk than the gold market, you’re well within the world of investment now.
The Role of Knowledge in Investing
Sometimes we’re unable to work directly on the thing we’re investing in. You can’t, for example, take your hammer over to Apple headquarters and improve their technology to drive up the value of your Apple stock. If you were Warren Buffett, and owned billions of dollars worth of Apple, you might be able to sit down at a board meeting, tell people what to do, and chance the company for the better that way. Many high level investors do this every day.
For the rest of us, we’ve got to let our brains do the work. Your $1,000 in Tesla stock won’t get you a meeting with Elon Musk. But you can do hard work to learn everything there is to know about Tesla, and let this knowledge inform you about whether buying or selling TSLA is the best idea at the moment.
The more you learn about potential investments, the more valuable your knowledge. It takes time and energy to organize and comprehend information. This is why knowledge is precious. People who have incredible “wealth of knowledge” (that idiom exists for a reason) can see opportunities that other people simply can’t.
And we’re not just talking about the stock market. It could be said that professional poker players, with their deep knowledge of odds, game theory, and practical psychology, know more about their game than many investors know about the stocks in their portfolio. In this way, we can probably see that, even in the act of betting, a professional cards player could be a kind of investor. The more you know, the more advantage you have, and the more likely you are to capitalize upon opportunities that others simply can’t notice or exploit.
How to Become a Better Investor
It should seem obvious at this point that hard work and learning are the best ways to open up opportunities in investing. There are bets that can have high risk or low risk, and investments that can have high risk and low risk. The way to minimize risk in either case is to do work to improve the situation to your advantage, or to learn information that competitors lack.
The more expertise you gain in any field, the more often you’ll be able to make big returns, compared to other market participants. When we enter realms of expertise, we start to get into a situation where words like “investor”, “bettor”, and “speculator” start to lose their key distinctions The key to market success is opportunity, timeliness, and perspective. You can exploit these advantages in any game, market, or environment.
If you want to become a better investor, start with what you already know. If you’re interested in the world of American business, study the industries which you already know the most about. Look for buying opportunities that play into market evolution that you can predict based on specialized knowledge. If you’re a gamer, improve your skills until you can reliably beat other players, monetizing the results.
When we invest in what we know, we’re able to convert natural interest into greater expertise, compounding the advantage we have over other market participants. If you don’t have any expertise to speak of, go where your interest leads, and spend a great deal of time reading before you actually spend any money. Time spent preparing almost always manifests itself as later profits (or minimized losses). When you’re prepared, it doesn’t matter whether someone else thinks you’re investing or betting. Your returns will have the final say.