The best advice I’ve ever ignored

Many years ago, when I was a mere twinkle in my parents’ eyes, my grandfather gave my father some very simple and sage advice: don’t drink, don’t gamble, and don’t chase women. My father then passed this advice down to me.

Now, apart from the occasional tipple, I hardly drink. Frankly, I don’t have the energy to chase after women. And, of course, I don’t gamble. Or do I?

Well, recently my father has said that I have been going against one of these rules. Because he tells me that investing is just a form of gambling.

The case against shares

I must admit, there is some truth in what he says. There is clearly a strong element of luck involved. Stock markets, and the shares listed on them, because of their openly traded nature, will fluctuate. And sometimes the fluctuations can be wild.

Shares are at the mercy of rumour and conjecture. A profit warning or other piece of bad news can send the share price tumbling. Unless you have powers of clairvoyance, you can’t be 100% sure that a share will do well.

I would agree that investing done in a reckless fashion really is no better than gambling. Say you listened to random tips. Say you didn’t bother to diversify your investments. Say you took other people’s advice for the gospel truth and didn’t do your own research.

Say you traded too much, causing trading costs to eat into your returns, and that your trades were at the mercy of your emotions, leading you to buy high and sell low.

Say you took no notice of valuation, buying shares which were the flavour of the month, despite their unjustifiably high prices.

When you think about it, there are actually so many ways to lose money in the stock market! For the uninitiated, for those who know little about the risks but plough on anyway, investing really is just gambling. To that extent, my father is right.

The thing is, ‘investing’ like that really isn’t investing at all. Sure, people use that label, but it bears no relation to investing the Motley Fool way.

The case for shares

But say you proceed with great caution. Say you pick your shares with great care and invest in a blend of strong, high-yielding blue chips. Say you invest in funds with a proven track record. Say you invest a substantial amount in trackers with minimal fees, ensuring that you at least match the market.

Say you research your investments carefully, taking heed of information from sources such as The Motley Fool, but also throwing in a healthy dose of scepticism.

Say you diversify your holdings so that you don’t have all your eggs in one basket. Say you are patient and bide your time to make your purchases. Say you ensure, above all else, that you leave a clear margin of safety, buying into shares and markets which are undeniably cheap but have great prospects.

Suddenly you are stacking the odds in your favour. Suddenly, investing no longer looks like gambling, but looks planned, considered and deliberate.

Of course, this is investment as it should be. But to develop a method of investing that works and that, importantly, suits you, takes time. Everyone, including the experts, makes mistakes. The key thing is that you learn from your mistakes, and don’t keep repeating them.

It’s not what you do, it’s the way that you do it

So, is investing gambling? The thing is, as regular readers of the Fool will know, there are a million ways to invest.

If you are reckless then ‘investing’ is the worst type of gambling there can be. If you are careful and intelligent then investing is not gambling, but is an integral part of long-term financial planning. In fact, the greatest gamble is to put all your money in a savings account, earning a miniscule rate of interest and being steadily eroded by inflation.

That’s why I have not taken my Dad’s advice and have continued to invest in shares. And why my advice to my son will be a little different: don’t drink, don’t gamble, don’t chase women. But do make a cautiously assembled portfolio of shares an integral part of your long-term financial future.

And — who knows? — that might just be the best piece of advice I ever give him.

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