Investing, Speculating, or Gambling?

Most people who have money on the stock market don't really know if they're investing, speculating or gambling - and there is absolutely some overlap between the three. These three activities are, as far as I can see it, three very distinct approaches to making (and losing) money on the stock market.

Gambling involves putting money down and risk losing it. The problem with gambling is that, for most players, it's not actually about winning, it's about playing. Have you ever met a gambler that won money and said he was done gambling now? That his wins were finally good enough and he could withdraw from playing? Probably not.

The same goes for the gambing approach with investors; they might think a small medical company, for example, might strike it big, so they put a lot of money down on a penny stock and either lose it all or gain it back 400-fold if the company discovers the cure for Ebola. It's a gamble, and there is never any way for people to know if it will pay off.

Personally, I find most investment gamblers have a very poor relationship to money. They might lose heavy several gambles in a row, win one and feel it's worth it. The game is what matters, not the balance or the final outcome. 

Speculating is doing something despite there being an inherent risk. You don't know if Alibaba is going to go up or down after their IPO, so you buy stock as early as possible, because you feel fairly confident that it's going to go up. You're not sure, but you've got a pretty good idea that's where it's going. You've done your homework and feel like the current value of the stock is lower than what it "should" be and think the market will surely correct this, at which point you can sell for a profit. 

I see a lot of day traders as essentially speculators. They look at a stock that's just dipped below where it tends to be during that point of the day, and pump in $10,000 assuming that it's going to rise back to where it was, then sell it off once it reaches that point (or slightly higher), because the assumption is that the next motion will be down again. There's some huge money to be made in speculation, but it's also risky and takes a lot of time and effort.

If I had a massive sum of money, no dayjob and could trade stock without any fees, I would be more inclined to speculate. Right now, though, it just really isn't worth it. 

Investing is being aware of the risk and playing what you think the odds are. The time scale is also much longer than in simple speculation. An investor might be familiar with the overall trends of certain markets and individual stocks during long term and finds the odds of that trend continuing to be fairly certain. He/she invests money in several different stock from different markets, knowing that even if one market or company were to have a slump or recession, your other investments would still pay off in the long term. A long-term investor approaches the market with the mind of a technician, not caring as much about the possibility of quick wins, but rather the mind of a person who has a specific end goal.

None of these three is better than the other; I think I should point that out, but they do portray very different personality types. I see myself as an investor, but have a few small gambles; mainly penny stock that might grow a lot very suddenly if the company strikes it big.

Dividend vs. Stock Growth

As I'm sure many of you know, I've been giving a lot of thought into the stock market during these past few months. One of my biggest questions has been the efficacy, in the long term, of buying stocks that increase in value versus stocks that pay out a regular dividend.

As far as I can see at the moment, both methods have clear advantages and disadvantages.

Dividend Stock

The obvious advantage of owning stock that pays out a high dividend is that you can more or less count on the money to end up in your pocket no matter how much the value of the stock goes up and down. If I want to get $50,000 a year from a stock that pays out a $1 dividend quarterly, the math is simple; I need to own 12,500 stock in that company. It doesn't matter what the price of the stock is; it can plummet by 50% overnight and - as long as the company doesn't change their dividend plan - my payments will remain the same.

One of my favorite dividend stocks at the moment is Chevron (NYSE:CVX), which during 2013 paid a dividend of $0.9 for the first quarter and $1 the remaining three quarters. During 2014, they've increased their dividend to $1.07, and we're looking at it probably reaching $1.10 within the next half year or so. The stock itself is a steady, gradual grower, moving from just over $102 per stock in the beginning of 2012 to around $125 now. It's no massive growth, about 18% in almost three years, but what it lacks in growth it more than pays back via dividends.

For example; if I were to buy 1,000 stock of Chevron right now, it would set me back about $102,000, but every quarter, I'd get $1,070 of that back. It'd take me 25 years to earn the purchase price back in dividends, assuming it doesn't grow at all. More likely, it's closer to 10 to 15 years. During that time, the stock itself has probably grown in value as well, and my $102,000 investment could be worth over $200,000.

The disadvantage of dividends, of course, is that it's very difficult to keep track of what you own. As these stock tend to grow slower than other stock, it's almost impossible to just sell your holdings for a quick pay-day, you need to sit it out and just let the money accumulate. For many, this is ideal; the idea of selling stock is anathema to many people. For others, who enjoy speculation and regular trading, this is a disadvantage.

Growers

The advantage of stock that grows over time is obvious. If you buy 500 stock at $200 each (for a total of $100,000) and it grows to a value of $270 a little later, you can sell off a couple of your stock to get some of your money back. This means you always have more or less ready access to capital that you can be fairly certain will increase over time. If you're saving up for a distant future event, say retirement, buying a house or car, or even just having a buffer in case you lose your job, this is a great thing.

There are several great "growers" out there. Apple (NASDAQ:AAPL) is one of the more obvious, having grown 3510% in 10 years (and 25,76% this year alone!). They currently show no sign of stopping, and I believe every dollar invested in Apple is a dollar well placed. 

The disadvantage, of course, is that you can never be sure that the stock will continue growing year on year, and sudden changes in fortune can stall your growth or even take away from it. People lost millions of dollars in the stock market crash of late 2008 and early 2009, often seeing their total holdings drop up to 60% depending on which markets they were most heavily invested in. Microsoft (NASDAQ:MSFT), which had opened in 2008 at $36.12, was down at $15.28 at their worst in 2009, and it took them until November 2013 before they'd recouped their losses and traded above $36.12 again.

Even though the stock market crash was a massive anomaly, small mini-recessions or stagnation happens all the time, sometimes in a single market (say housing or medicine) or sometimes as a general trend in all markets. Relying on stock growth can be very risky, but if you spread your wealth into many markets you're safer than most.

The best of both worlds

There are a couple of stock out there that have both great dividends and great growth. These two things buffer against each other, so that even when growth is small, dividends still give you regular cash. Also, even if the dividends might be small, the growth of the stock makes up for it. I believe it's essential for your portfolio to include a couple of these.

My favorite best-of-both-worlds stock at the moment is Disney (NYSE:DIS). Even though they only pay dividends yearly, the value of their dividends has grown very rapidly. Just these past five years, the change has been:

  • 2009: $0.35
  • 2010: $0.40
  • 2011: $0.60
  • 2012: $0.75
  • 2013: $0.86

They still haven't announced their dividends for 2014, but I'm expecting them to land around $0.90 to $0.95, possibly even above $1.

As well as having good dividends, their stock price growth has been a very nice upward curve since their drop in early 2009. They opened 2012 at $39.91, 2013 at $52.19 (more than 30% growth), 2014 at $76.11 (more than 40% growth). They're currently hovering around $90, which is 20% higher than they opened in January. Stock bought for $100,000 at their very lowest in September 2011 would be worth $267,730 now and would have paid out $6,714 in dividends. Adding up the growth and the dividends, that's about 275% growth in three years.

Another favorite in the same category is PepsiCo (NYSE:PEP) which has steadily grown their quarterly dividends from $0.45 five years ago to $0.66 today. During the same time, their stock value has grown by about 55%, most of that coming from gains in 2013 and 2014. $100,000 invested five years ago would be worth $171,752 today ($17,503 of which would be dividends, the rest in stock growth).

The Nettocracy

There's an interesting concept in politics that I'm slowly becoming aware of. The best translation, unfortunately, is "nettocracy", which is very close to 'netocracy', which is already a term. Basically, the idea is that you would have a multi-party system (this only really works when you've got four or more parties), and every person would get two votes when it comes time for national elections.

One of the votes would be placed in favor of the party you want to lead your country.

The other - an "anti-vote" - would be placed on the party which you would least like to see lead your country.

Nettocracy in Swedish Politics. The green lines are the positive votes, the red lines are negative votes. The black line is the "net total" of votes.

As the image on the right shows, there are two parties (the Swedish Democrats, which is our racist party - and the Feminist Party) that would end up in the negative if this were the case - despite enjoying a total of 13.2% of the popular vote together. Parties like Folkpartiet and the Christian Democrats are hardly affected by the negative votes, probably because they're not the kinds of people to ruffle any feathers. The Moderate party, our current government leader, gets more than 11% of the negative votes, most probably because the left-wing voters realize that they're the biggest threat to a left-wing coalition.

It's a fascinating idea, and one which I definitely think deserves paying attention to. Why should you only care about what people most of all want when you can also ask what they least of all want? 

The Six Hour Work Day

Less than four hundred years ago, the trend was to work ten to twelve hours a day, six days a week. This is what was needed to make a living, to afford housing, food, clothes and small luxuries. Most labor was still manual, and slaves were used to do most of the heavy lifting, ardurous work and toil. The discovery and invention of things like fossil fuel, water mills and steam power began changing this fact.

Less than three hundred years ago, people began moving to cities. Industry slowly began to form, and people began reaping the benefits of simple machines. We were able to produce more in less time. People began having more free time - more leisure time - and dependence on manual labor lessened. Slavery was still rampant and people were still beholden to masters and fiefdoms.

Less than two hundred years ago, the Industrial Revolution had changed everything. A third of the population of the Earth had moved from being sustinence farmers to being workers in mills, factories, sweatshops and tanneries. The average Englishman, who had toiled in the fields from morning to evening every day of the year, could now draw a salary from a factory and find time to relax, think, learn and socialize in his or her ample free time. Child protection laws began to emerge once we were no longer dependent on forced manual labor and most countries abolished slavery.

Less than a hundred years ago, trade and specialization had led us to a financial boom across most of the Western world. People could spend a third of the day, five days a week, providing specialzed labor using highly sophisticated machines in order to greatly improve the lives of thousands of others. By being the person who sowed clothes for eight hours a day, you clothed thousands while drawing a salary that allowed you to benefit from the labors of others.

At the same time, our footprint on the world lessened. Thanks to advances in agricultural technology, especially in new grains and artificial fertilizers, we were able to grow twice the amount of food grains in half the space as we would have a hundred years earlier. Fewer people were needed to sustain the population of Earth and urbanization took off.

Less than fifty years ago, more than half the population of Earth lived in a city. More than half of all of us lived on just seven percent of the Earth's surface. That number is still increasing, leaving more nature to the animals and plants of the world. Due to the increased proximity, pollution lessened, welfare increased, free time increased and labor costs went down. Where governments did not meddle in trade and finance, markets bloomed and people got richer.

Today, most people work five days a week, somewhere between seven and a half to eight hours a day, depending on local labor laws. Many believe this to be the pinnacle of mankind, the highest attainable form of success, but it is only another step in mankind's development.

We're still building smarter and better machines, technology and services; allowing fewer people to do more in less time. Average salaries per person per hour are growing and we've never had the same kinds of freedom to enjoy the surplus produced by others as we have today. Only in countries where people have had the misfortune to grow up with corruption or strictly controlled markets have we seen slow or negative growth. Countries like North Korea starve and deteriorate because they have closed their borders to the outside world, refusing to benefit from the surplus the world creates and not adding to it. Even in newer markets, such as China and India, the Western countries have drawn upon cheap labor and enriched the country by dramatically raising the salaries, standards and benefits of the people who work there. We're not seeing a race to the bottom, as so many pessimistic analysts feared in the eighties, but a gradual raising of what the bottom entails.

Within the next hundred years, we'll have technology that far surpasses anything we can dream of today. Machines and software will be able to perform tasks we all believe can only be performed by people today, and countless thousands, if not millions, will be made redundant thanks to technological advances.

This is why the perspective on work and employment needs to change. So many people believe that employment is a vital part of life, that idle hands are up to no good and that people need to work to draw a salary that can sustain them. If historical trends are to be believed, however, this is not the case. We'll have a massive portion of the population whose livelihood can be sustained by machines that do the work for them, machines that invent, produce, deliver and sell goods and services. A human workforce will become far less relevant. 

I believe that we'll see the first all-software corporation, no human employees at all, before the year 2100. Laws need to change to allow for it, of course, but we're coming close to where this is possible, especially with the advent of smart trading algorithms, early success in artificial intelligence and the massive processing power available in computing today. I believe we'll start to see massive profits coming out of automated services, massively reducing the cost of living for humans to the point where we no longer need to work to make a living.

We'll begin to experience a brand new industrial revolution, and - much like in the former revolution - the birth of a new upper middle class defined by their free time and surplus.

This is the reason I believe the current discussion about the six-hour workday is so important. Not because I feel it is relevant yet - at least not in all fields of work - but because we need to remember that the current eight-hour work day is not a final point in our evolution as living, trading, market-reliant human beings.

Your First Million

Making your first million in Sweden is simpler than in The United States; not because we have a stronger business climate, lower taxes, higher salaries or anything like that, but because we have a weaker currency. By the time I reach one million Swedish Kronor, I'm actually just sitting on $146,167. To reach a million dollars, I'd need 6,841,450 Swedish Kronor.

Interestingly enough, the million dollar mark is roughly where I'd need to be to be financially independent and live off of the interest (assuming a market growing about 7% per year).

Assuming I invest 4,500 Swedish Kronor (SEK) a month (roughly $660), reaching that number will take me around 126 years. Even adding more or less my entire tax rebate every year, bringing my total to 69,000 SEK a year (around $10,000), it'll still take about 100 years.

Obviously, something needs to change in this equation. A lot of people look at their own possibility to invest in this way and become disheartened when they realize how long it will take for them to have a sizable chunk of savings. 

This is where the strongest force in the universe kicks in: Compound Interest.

Those 4,500 SEK I invested the first month will be worth 8,852 by year ten. That first year's worth of savings, those 69,000 SEK, would be worth 190,373 by year fifteen. So, despite investing just 1,035,000 SEK during fifteen years, that money has grown to around 1,855,275. The year after, despite adding just 69,000, my sum total has grown to 2,058,974 - a growth of 203,699!

All this math considered, with an average interest rate of 7% per year, those 100 years are cut down to a measly 30 years.