August 25, 2009

When investing turns into gambling

USA Today ran a story last week about recent trading in old GM stock. General Motors, of course, declared bankruptcy while saddled with huge amounts of outstanding debt, making it virtually certain that their old stock will wind up being completely worthless. So why do millions of shares continue to change hands each day?

There are two reasons that I can see.

One is ignorance: some unfortunate people apparently think what they are trading is new GM stock. Sadly, these people are misinformed. If anyone reading this is among this crowd, please understand that there is no new GM stock available yet. If you own or are trading GM stock, it's the old stuff, and it's going to be completely worthless at some point in the not-too-distant future.

The second reason so many shares of GM continue to change hands is simple greed. Knowing that an asset is eventually going to zero, yet jumping in and out of it in an effort to ride sharp price movements, is no longer investing. It's gambling.

Investing is when you put your money to work in some productive enterprise with the hope of earning a return. Gambling is when you put money at risk in a game of chance with the hope of winning a quick profit. Note, these are my off-the-top-of-my-head definitions, nothing official. But they sum up the difference pretty well, I think.

Granted, there are times when the lines between investing - speculating - gambling can seem to get a little gray, leading some Christian investors to question if there's really a clear difference between them. Despite the fact that some investing involves luck, and some gambling involves skill, I'd still argue there is still a sharp distinction between the two activities. On one side is the GM stock investor of a decade, or even a year, ago. On the other is the GM stock trader of last week. Same stock. Big difference in intent and outlook.