Trying to pick a winning investment may seem like buying a lottery ticket. What’s going to boom in the future?
“Afterpay?”
“Medical marjiuana stocks?”
“Bitcoin?”
It may seem like it’s a game of chance and luck. However, this is not the case. Long-term stock market investing is not the same as gambling.
Here’s why. When you purchase a share, you own an asset – you are a part owner of a company. You are supplying your capital to a business with the expectation that they are going to make a profit. When the company profits and grows, it returns this back to the shareholder in dividends and capital gains. This is an actual way to make money and doesn’t involve luck. It does however, take decades for the stock market to turn your pennies into millions.
While this comes with risk (e.g. the company going bankrupt), the risk can be mitigated by conducting a fundamental analysis (researching the industry and company) as well as strategies such as diversification. While luck may form a small part of the equation, long-term stock investing is a reliable way to grow your wealth over decades.
When you purchase a lottery ticket on the other hand, you make money through luck. It is not a reliable way to grow your wealth. In fact, statistically the odds are seriously against you. Even if you are a very lucky person, the odds of winning the Oz Lotto Jackpot are 1 : 45,379,620. Ouch. However, if you were extremely unlucky and only invested in the worst times of the stock market – you would still end up a millionaire!
As an unlucky person, I think I’ll stick to investing!