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Is Investing ‘Gambling?’

February 2, 2010 – 12:22 pm
The stock market has some very unusual idiosyncrasies. From day-to-day, its reactions are insane. One day the market is depressed because North Korea shot off a couple missiles or a terrorist bomb killed a bunch of innocent people. But in the long term, stock prices go up and down based on earnings.
Compare any company that has made money with those that haven’t. Microsoft and Google are good examples of companies that have made money. Or look at Apple Computer’s history in the market. In Apple’s case, the stock ran up with its first personal computer and then languished for years until Apple invented the iPod. Then earnings skyrocketed and so did Apple’s stock. If you don’t believe me, name one stock, just one, that made money, then went out of business–causing their stock price to plummet to zero. This fate may have met a few companies because of poor or criminal management, but generally, there aren’t any. Now see if you can find a company whose stock price did not go up when it doubled its earnings year after year. It is possible there is a company out there, but if that company keeps that type of performance up, the stock price will eventually reward those earnings.
Gambling, by comparison, is more random. You can hedge a gambling bet with knowledge and the application of skill, but it all comes down to a random event based on an uncertain set of possibilities. Investing is buying an asset that has value. That value changes based on earnings.
Excerpted from “Above Average Investing for the Average Investor”
by Steve Peasley

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