Investing vs Gambling

In current, unfortunate parlance, anybody who buys stocks or other securities is often called "an investor" (and the term easily spreads to such purchases as fine arts, ancient rare wines, gold coins, pure-breed horses...!). Back when Benjamin Graham was getting started, about a century ago, just about anybody operating in the stock market was often called "a speculator" -- indeed, the title of Samuel Armstrong Nelson's excellent 1903 book about stock investing was... "The ABC of Stock Speculation"!

Neither terminological confusion -- the traditional one, where stocks are inherently "speculation", and the modern one, where just about anything is "investment" -- is helpful. Much better, IMHO, to think of "investment" as being focused mostly on the patient, business-owner-like attitude I've been sketching in recent posts (summarizing part of Graham's great "Intelligent Investor" book), "speculation" as most of what is called "investment" today;-), and "gambling" for quite a bit of it.

In these terms, Graham has priceless advice...:

Speculation is always fascinating, and it can be a lot of fun while you are ahead of the game. If you want to try your luck at it, put aside a portion - the smaller the better - of your capital in a separate fund for this purpose. Never add more money to this account just because the market has gone up and profits are rolling in. (That's the time to think of taking money out of your speculative fund). Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.

This has been precious practical advice to me, and I think it may be to you unless you're the exceptional kind of person who's really totally and utterly indifferent to the lure of gambling and "the madness of crowds" under all circumstances.

I'm not quite that good and wise (yet;-), so, had I tried to practice the ascetic optimum of "no gambling at all", I might well have succumbed to the excitement of some of the many small and large bubbles that the markets (plural, considering the international nature of investing, the many kinds of securities, commodities, futures, &c) typically are showing to some prominence or other at most times, and compromised my main investment funds and operations.

Thanks to Graham's advice, instead, I keep no more than 1-2% of my net worth in a small, separate "mad money" account, actively play with it, often over-trade with respect to what I know I should be doing (not a defect I'm entirely free from even in my "real" investment, but, going wild with it in the "play" account saves me from doing worse in the "real" one!-), trade naked options, use margin, short some stocks or commodities, and so forth. The 1-2% level is kept by occasional rebalancing -- in my case, not on a "timed" basis, but considered every time the total worth in the "mad money" account falls much below 1%, or rises anywhere above 2% (the latter trigger helps me intrinsically "get" the "time to think of taking money out of your speculative fund" that Graham mentions in passing;-).

As an extra, practical tip -- I've recently found options house quite suitable for this purpose -- low commission rates, decent execution, decently usable platform all around especially for complex options plays. As an added bonus, they even offer a free "virtual account" where you can simulate trading, speculating and gambling without actually putting any real money at risk (at least it helps learning their platforms and trying out weird options plays, though I admit that for the actual purpose of "getting the gambling craving out of my system" I'd rather have some -- albeit small -- amount of real money at stake... just like, differently from, say, bridge, poker is really no fun when played for beans!-). Having a completely different and separate platform for the small "mad money" account as compared to the larger "serious money" ones helps me psychologically, I think, to keep them completely "disjoint" in my mind, avoiding the "mingling" that Graham's great advice warns against!