The lure of making a quick buck playing the markets is strong and has been tempting people for centuries. From the irrational prices and speculative frenzy over tulips in 17th century Holland to day trading tech stocks in the late 90’s, the temptation to speculate is irresistible to some people.

It seems relatively harmless. When you are young and don’t have much, the downside seems low. When you are older and established, you might think, “What is the harm in playing the market a little?” Plenty. We’ll get to why in a bit.

The simple answer to the question, “How can I make a lot of money in financial markets, fast?” is to be right about whether the price of a security will change and by how much it will change.

Very few succeed playing the markets

One of the problems speculators have is they overestimate the odds of success. There are a myriad of trading techniques and financial instruments that allow one to bet whether the price of a security will go up or down, a little or a lot, over a short or long period of time.

When one multiplies the number of ways to take a position based on the expected price change times the thousands of securities on the markets, the number of combinations is almost infinite. Nonetheless, everyone who has speculated was confident they had a winning combination. “Sure, this sounds risky to others, but my bet isn’t that risky,” goes the thinking.

When was the last time you saw a story on any of the millions of people who bought a lottery ticket but did not win?…The stories are about the big winners because they are very few.

When was the last time you saw a story on any of the millions of people who bought a lottery ticket but did not win? Buying a losing ticket is not new or unusual. The stories are about the big winners because they are very few.

Likewise, the financial media loves to tell stories about the few who quickly make a lot of money. With so many speculations occurring, big winners appear regularly. It doesn’t take many of these tales to give one the impression making money quickly is an achievable objective. Once that idea takes root, it is easy to begin looking for such opportunities and rationalizing away the risk. Add in some FOMO (fear of missing out) and a speculative bet gets placed, which one’s brain calls “an investment.”

Unlike gambling in a casino or on the lottery, the odds of success and payouts from speculating in the markets are not laid out precisely for one to consider. Everyone comes to the markets with their own assessments of what the odds are. Those who want to buy find someone who wants to sell, and they agree on price. This is how markets have worked for eons. Due to today’s technology, the process can happen with lightning speed and in large volumes. Profits – and losses – come faster than ever.

Speculating can ruin you

The latest rage in the media has been the trading action, called a “short squeeze,” around GameStop. Short squeezes have been going for decades and have high risk on both sides.

playing the marketThe squeeze on GameStop has gotten so much press because apparently the action was started by a group of individuals in a social media group, which had not happened before. As is typical of a short squeeze, the window to get in and get out is small.

On average, individual securities are twice as volatile as market indexes. Losses from playing the markets can be great. One can lose everything put into the speculation and more. Theoretically for some, the losses are unlimited.

Nonetheless, the temptation to speculate can be great. A whole new generation, empowered by mobile apps, is falling for it. In addition to the usual dabbling in trading stocks or playing the markets by trying to guess which way the market will move, there are plenty of shiny objects to chase. Heck today, you can bet on things like Bitcoin which do not shine, pay interest, earn money for its owners, or really do much of anything.

The GameStop matter will continue to get press because the fallout from it is triggering lawsuits and regulatory investigations. But the simple fact is speculative action, like the squeeze in GameStop stock, is irrelevant to true investors. The few speculators who profit do so at the expense of other speculators, not prudent investors.

Investors approach the markets differently. Real investors buy diversified holdings which pay them a share of company earnings, dividends, or interest and maintain ownership for long time periods – instead of betting the greater fool will buy them out soon.

What is the harm in playing in the markets a little?

For the financially secure, speculating creates a kink in the armor. Successful speculation leads to future speculation. Casinos thrive on winning gamblers putting “house money” back in play. If you’ve ever won a bet with a friend and thought, “I wish I bet more,” you can relate. See The effect of speculation on financial security.

For the young just starting out, playing the markets can be just as dangerous. In addition to the possibility of taking on more speculative risk if successful, failed speculations cost more than money. Arguably our most precious resource is time.

Take a 25-year-old with a good job who sets aside some money and figures he can use an app on his phone to trade his way to riches. If he loses $10,000 on a speculation, he didn’t just lose $10,000. He lost the ability to invest that $10,000 prudently over his lifetime. If he had just put the money in a fund which earned the historical average return on stocks of 10% per year, he would have about $500,000 at age 65 and at least $20,000 a year of income for the rest of his life. Instead, he now must start from scratch.

Regardless of age or wealth, once the speculative bug bites, the itch must be scratched. Often, people find themselves searching for the next bet to make, never considering how the time, energy and attention spent on that quest could be used for more impactful matters. At its worst, playing the markets becomes addictive and can destroy families as well as finances. Speculating is a common cause for the bankruptcy of athletes, lottery winners, and entertainers.

Never forget. When you buy into a position, you are buying from someone that does not think taking that position will pay off soon.

No need to play the markets

You cannot buy unless someone sells, and you cannot sell unless someone buys. Never forget. When you buy into a position, you are buying from someone that does not think taking that position will pay off soon.

The financial press is obsessed with the near term, guessing what the next big thing will be and what to buy now. But the question one must answer before deciding what to buy is, “Will I approach the markets as a speculator or an investor?” Speculating has allure while investing principles can be boring. Boring – except for the part where they work very well!

Speculators have much poorer odds of attaining or maintaining financial security and are far more likely to cause themselves a catastrophic problem or to die by a thousand pin pricks as they lose bits of money on a series of “harmless” bets. If one bets so much that the outcome could dramatically improve one’s financial standing, the bet also has the potential to cause catastrophic harm. If one keeps the bets small to avoid devastation upon failure, those bets are not likely to have a big effect on one’s finances.

Is the effort and the stress even worth it? What could those people be doing with their time and energy instead of seeking out that elusive big score?

Right now, thousands of people on social media (and the hedge funds and large institutional traders who normally dominate the speculative action in financial markets) are scouring the markets and social media for another GameStop style squeeze. That’s a lot of eyeballs. Is joining the quest really a good choice? Does one really want that stress?

True investors are not betting on catching a shooting star. They are betting businesses will continue to adapt as conditions change to generate profits. Diversified investors believe that in the aggregate, as has always been the case, businesses will increase in value over time, not that any particular business will be a winner or a loser. True investors are patient enough to let this dynamic play out and are disciplined enough not to gamble their life savings (or their children or grandchildren’s) on a speculation.

Clients of our firm can rest assured knowing we manage their money in a diversified, patient, disciplined, and true investor manner. Invest, don’t speculate.

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Moisand Fitzgerald Tamayo, LLC is an Orlando, FL and Melbourne, FL based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between.

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About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.

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