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The Fine Line Between Investing and Gambling

© Arman Rousta

"Investor education" has been a commonly used buzz term in the financial services industry over the past five years. Mutual fund companies have masterfully marketed themselves as proponents of investor education, while all the while pulling the wool over our eyes when it comes to some of the most fundamental aspects of this education - transparency in fees and investment returns. It has taken a major stock market crash, SEC investigations, and a series of lawsuits against investment banks, for these issues to come to the table; and even then, in spite of new regulations, little has truly changed. The slaps on the wrist, in terms of multi-million dollar fines to investment firms, have not changed all that much from a consumer standpoint. Further, in this information age, with so much reading material through print and online sources, investor education has lagged behind. You wouldn't believe it if you just look around and see the wealth of financial information out there - but information is not education, and much of it is in fact manipulative misinformation. Yahoo and every site out there it seems have stock charts on the front page and stock tips from every "expert" on the block. Does this help us make sense of the financial universe or simply get us hooked into the biggest money-making scheme around?

Uneducated Investors. A recent Vanguard study found that 9 out of 10 active mutual fund investors answered incorrectly when faced with the following question: "When interest rates rise, what is the effect on bond prices?" Simply put, if you don't understand fundamental financial concepts, which are not easy to grasp by the way, you should severely limit the amount of capital under your direct control. For the most part, investors are out there blindfolded, shooting in the dark when it comes to making personal investment decisions. We don't want to sound pessimistic and say that they have "no chance", but in the highly volatile and unpredictable financial markets, the retail investor may be better off placing bets with his bookie than with his broker. After all, is there much difference between betting on a team and betting on a company, besides the fact that trading stocks is legal in every state within the U.S.?

From a money management standpoint, watching people take bets on companies, groups of companies and sectors, bears much similarity to watching them bet on a promising racehorse. While there is always a chance of winning, it is nevertheless a gamble. Surely, mutual funds allow investors to spread their risk across multiple companies, but even then, protection against inevitable downturns in the market is typically limited. Most stock mutual funds have a long bias, meaning a generally favorable outlook on market growth. Everyone wins when the markets surge, as in 1990s dotcomania. When markets decline, however, as in 2000-2002 tech bubble burst, the retail investors are the main losers, partly due to their own greed and partly lack of expertise on how to manage money.

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