Investing, Trading, Speculating, and Gambling. If you cannot distinguish between these words, you need to be doing a SIP in a mutual fund and not bother about direct equity at all.

Gambling is exciting, Gambling is fun, Gambling can make you very rich – well that is what you think. This is of course wrong and the Casino house gets richer all the time. It is the House that always wins.

Of course there are professionals who play the Gambling game with a lot of study, knowing people’s behavior, psychology, experience – but they make money at the cost of the amateur who goes there to have ‘fun’. Everyday a lot of ‘fun’ seekers do go to a casino. Of course the lottery is the worst form of gambling – there is no way in the world that you can make money buying lottery tickets, the odds are stacked completely against you. However people do buy lottery tickets.

Now look at investing. It is dull, boring, and takes a lot of time. There is nothing exciting at all about investing. However I know of many many people who have become seriously rich over the past 30-40 years. Yes there is no short cut to wealth. You make money because you buy a decent stock at an attractive price and wait for the market to discover the price. Look at shares like Supreme Industries – i have been holding it from the 1990s. Nothing glamorous, nothing great but a great wealth creator. Like Kajaria ceramics. Or Essel Propack. I am not even talking about Siemens, Ingersoll Rand, Colgate, HuL, PnG, Cadbury, Hoganas, Kodak, – a few of them delisted enroute.

I have said many times that you cannot invest like Warren Buffett. However when we invested we bought shares because we were convinced that the dividend yield over the years will make the market (force the market?) to recognise value. Imagine buying Indo Gulf Fertilizer, Cholamandalam Investments, Coromandel International, Apollo Hospital all under the price of Rs. 20 a share in the 1980s because they were giving great dividend yields. Or buying Rane Madras at Rs. 100 or thereabouts because the dividend yield was upwards of 7%. Yes you have to wait till the volumes develop, market recognises the value, etc. and it requires a lot patience. However you have to remember that market is a slave of EPS and PE. If the EPS keeps improving and the dividends keep improving, the PE jumps up – and you are double dividend. And remember the dividends were reward for your siting tight. And if you do direct equity investing there are no waiting charges. Double Bonus.

So is trading akin to Gambling? No again. If you are a smart trader there are many opportunities on either side of the market (remember the poor investor he does not buy put options!!). However there is a lot of science to trading too. It involves studying patterns, knowing mass psychology, ability to cut losses fast, knowing how to let the long positions run, and get 7 out of 10 calls right. Ability and conviction in the people who are executing, research aid – all this is missing in gambling.

So if you have to make money in the markets, you need patience not of years, but decades. Wealth is a multi generation thing….