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Can we gamble in the stock market?

Md Jamal Hossain
THE great economist and Noble prize winner in economics, Paul Samuelson once said “Investment should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." This statement contains the message that investment is not like playing gambles. One should invest with long term vision not with the purpose of gambling to be rich overnight since no market offers such opportunity for anybody in the world except the house of gamblers such as Las Vegas. But the stock market, though not a place for gambling, involves gambling. So, should we gamble? We say yes but a simple yes is not sufficient since gambling involves the higher possibility of making an outright loss. While making investment decision in the stock market, an investor faces the question: whether he is taking risk or he is gambling? Often the term risk is confused with gambling and investors fall into the prey to folly behavior and pay the price for their mistake. If he/she gambles, then how should he/she gamble?
Sometimes investors need to take pure risk and sometime they need to do pure gambling because investment opportunities come with different information which is in most of the cases not complete. For example, if an investor sees that a stock is being currently traded at Tk 200 and intends to purchase that, he/she needs to forecast the discounted future value of the share. Even then he/she calculates the Net Present Value (NPV) of the share, he/she may find it quite hard to reach on that basis to settle into the decision whether he/she should purchase that share at all. This is a case of taking pure risk because his investment decision is circumscribed by calculated uncertainty and this uncertainty introduces the element of risk in his
investment. On the other hand, if he sees that the value of a share which is a junk share has increased to 250 which he/she purchased at 175, he may conjecture on the basis of second hand information that the value of the share may increase more than 250 in the future - a silly behavior which pauperized thousands of investors in stock 2010 stock market crash - and opt not to sell the share though the current market price offers good profit. This is a pure gamble. Minimizing losses along with gambling in the stock market is the foremost challenge for an investor. Gambling on share price 250 puts the investors at high stake of making loss in future. So what is the solution then?
To find out the solution, we can imagine a situation like this. Let's say person X is a stock market investor and has invested lOOOOOTk. fresh capital in the stock market. To simplify the analysis more, we also think that he has invested the whole capital in one stock called y. His prudent investment strategy has paid off, and he has made a gain equal to 4000011c in the stock. Now he/she is contemplating to build an investment portfolio investing in different kinds of stocks. In his portfolio, there are two stocks called z and w. Investment in z involves taking pure risk, and the investment in w stock involves gambling since he/she has no clue about the NPV of the stock and he just invests in this stock with a 50-50 chance. As he/she has in total 1400001k to invest in the total portfolio including in the z and w stocks, he/she must first determine how much to invest in w stock and how much in z stock. Then, the very crucial one, he needs to specify which money he should invest in which stock. Though total capital is now 140000Tk, 40000 is the profit earned from selling y stock. Since, the investor will gamble on the market price of w stock, he should gamble in such way
that his loss is minimized and gains are still maximized even if he/she makes an outright loss. How is this possible? This is possible if he/she invests out of40000 profits in w stock. Now even if he/she makes loss, he/she will lose the profit not his original capital. Similarly, he should invest out of 100000 in the z stock. The strategy is that one should gamble in the stock market using money collected from immediate gains or the vety recent gains from the stock market. This will help him/her to minimize loss and maximize gains in the stock market.
What is the justification for this strategy? The justification is that today’s gain is tomorrow's capital and yesterday's gain is capital not only for today but also for tomorrow. In this sense, loss on immediate gains is always less than the loss on distant gains. If we simply state the investment strategy, we say that don't destroy your capital but destroy your gains.
If investors had gambled using gains from share market, our projection is that crash which has already occurred would never have happened, irrespective of the fact whether somebody is manipulating the market price or not Now even if all investors gamble, which is not true, gambling will not cause a big crash as the scale will still be too small to cause a big crash. While Samuelson has advised us to go to Las Vegas to seek excitement in the investment, as long as the stock market offers the chance for gambling, gambling in the stock market is more economic than gambling going to Las Vegas. Therefore for a stock market investor knowing how to gamble is more important than learning how to resist the temptation of gambling which is in most of the cases not realistic keeping the nature of stock market in consideration.
The writer Is with the University of Denver, USA