Highlights
- Trading to get rich is fundamentally different than investing to build wealth
- Not knowing the difference sets you down “an extraordinarily dangerous path…”
Aswath Damodaran recently appeared on The Long View podcast…
Damodaran is a well-known professor of corporate finance and valuation at the Stern School of Business at NYU. In other words, he studies companies, stocks, and how they’re valued. The investing world greatly respects him.
Morningstar’s podcast hosts ended their episode on a light note by prompting ChatGPT to create a question that would “annoy” Damodaran. ChatGPT asked:
Can you give me a hot stock tip that will make me rich quickly, without any research or understanding of the company’s fundamentals?
Damodaran – a man whose life and career are built on a calculated understanding of investing fundamentals – was amused, but admitted he hears similar questions frequently. He responded to such investors:
They miss the essence of investing. You don’t invest to get rich. You invest to preserve and grow wealth. I think the minute you think of investing as a pathway to getting rich, you set yourself up for all kinds of mistakes. You overreach. You overbet. Because that’s the way you get rich. You gamble.
I think we need to redefine investing. Investing is about preserving and growing wealth, which means if you’re a doctor, go back and do your job. Earn your income. That’s going to be at the heart of your investing. If you’re spending most of your time as a doctor looking through the stock pages trying to pick stocks, your wealth is not growing. Your investing can be great, but it does not pay off.
So I think that it’s much more common than we accept. They’re traders. They’re not investors. They want to trade their way to riches.
And they look at success stories. There’s a selection bias. Now you have YouTube videos of people who got rich in 5 years by trading. And you use those as role models. It’s an extraordinarily dangerous pathway you’re on because history suggests sooner or later you’re going to leave that casino with nothing in your pocket.
In Other Words…
Damodaran’s advice blends perfectly with what we espouse on The Best Interest.
- Investing is a long-term pursuit. Slow and steady really does win this race.
- Diversification is “the only free lunch” in investing. You need to diversify.
- Biases distract us and cost us real money. Investors frequently mistake dumb luck for skill. They form opinions from limited data. Or they’re simply overconfident.
- Trading stocks is like searching for a needle in the haystack.
Be an investor. Preserve and grow your wealth. Ignore the noise.
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-Jesse
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