There's a difference between investing and trading on the stock market

These are nerve-racking times for investors, with stock markets bouncing all over the place. We were euphoric when the ASX hit 7162 on February 20, but that emotion was short lived - it plunged to 4546 just four weeks later.

Of course, there were headlines galore proclaiming how many billions had been wiped off our wealth, and many retirees went into panic mode. My inbox was flooded with emails asking whether to sell now, and come back in when the market had turned, or in more extreme cases put all their superannuation into cash and then "enjoy a risk-free retirement" for the rest of their lives.

I reiterated what I have been saying for years: picking the top and bottom of markets is impossible, and the only sensible way to handle the current volatility is to take a long-term view and hang in there.

From that day, the ASX went steadily upwards till it hit 6148 on June 10 - that's a rise of 36 per cent in just 10 short weeks. Since then it's been moving more down than up, and now we are seeing a flood of headlines indicating a second crash may be upon us. Who knows? As far as I'm concerned it's all too difficult, and I continue to look at my portfolio on a long-term basis.

But what concerns me enormously is the rise of gambling in our community. We are bombarded with gambling advertisements, even in prime time when young people are watching, and statistics show that stock market trading has exploded during the COVID-19 lockdowns. Just recently, one newspaper carried a two-page feature on the new breed of share traders, quoting one exclaiming, "This is not right - it should not be this easy." In the United States, the number of active trading accounts have increased by 70 per cent, helped by a popular trading app - Robinhood - which is offering zero commission on trades.

And that's the problem: it is all too easy. You just pick a stock, noticing it's up $0.30 today and down $0.30 tomorrow and that pattern keeps repeating. You tell yourself that there's nothing to it. Sell high, buy low, and make a fortune.

Well, as the old saying goes, there is no such thing as a free lunch. The problem with trading is that it is essentially gambling, and it's highly addictive. Psychologists claim the hit the person gets from a successful share trade, or even a great golf shot, is remarkably similar to the hit from injecting drugs.

Charlie Munger, Warren Buffett's business partner, summed it up perfectly when he said, "In the modern world people are trying to teach you to come in and trade actively in stocks. Well I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin."

He is spot on. A major benefit of shares is their unique ability to be bought and sold quickly in small parcels. But this benefit is also their biggest drawback - it encourages people who should never get near the share market to start to use it as a casino. Just this week Forbes reported that a 20-year-old from Illinois had committed suicide when his account went $750,000 into the red.

And to make matters worse, all this gambling is contributing to the volatility.

I understand we are living in uncertain times. But anybody serious about keeping their finances in good shape needs to understand the difference between investing and trading. Investors take a long-term view and do not try to catch a rising or falling market. Traders are like people who hunt day-to-day - many finish up dying of starvation.

American economist Paul Samuelson put it simply: "Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.noel@noelwhittaker.com.au

This story Take a long-term view when investing in the stock market first appeared on The Canberra Times.