The sharemarket - investing or gambling?

I have heard plenty of discussions at work in regards to the sharemarket; the general consensus is this is a pure form of gambling with little to do with investing. They liken share selection to throwing darts at a dart board, they are quick to share tips on penny dreadlocks in much the same way tips are bandied around the race track with an in the know punter sprouting free tips.

Now let's keep in mind these people undertake no research, no analysis and no strategy is utilised - indeed, they are gambling without a strategy. When you gamble, you own nothing but when you invest you own a small part of the company. Now we all know share prices fluctuate, this a market after all and if share prices rise every time then there is no downside risk. Yes, markets go down as well as up and a prudent investor needs to understand the factors affecting markets.

A number of factors need to be considered, the general economic conditions are paramount, a working knowledge of macro-economics is vital. This doesn't mean sitting a formal course although this helps, for the first 20 years of my share trading and investing, my knowledge of macro-economics was gained from reading books.

A working knowledge of fiscal policy, monetary policy and exchange rates is vital; the interactions of interest rates, balance of payments, inflation, commodity prices and unemployment all factor in general market decisions. 

Then you need to look to individual company performance by looking at the earnings per share, price earnings ratio, dividend per share and dividend yields as a fundamental analysis. The company needs to be compared against other businesses within the sector for performance, no fundamental analysis is complete without some form of technical analysis.

Now I know a number of stockbrokers view charting as voodoo, but you really need to view the entire market and individual share price from a historical perspective to verify the trend. You might have determined through fundamental analysis the share you seek investment; for me, technical analysis is all about market timing as there is no value in buying in a market top or major downtrend. 

For me, it is better to wait for the trend to turn around as general market conditions improve or the factors affecting the downtrend such as commodity prices, competitive forces, supply chains or break-even points are addressed.  

I like to look at the upper management and their performance, well managed businesses have shown long-term gains with current upper management teams that have succession plans in place. I prefer to not invest in companies with a history of management scandals, they set the strategy and direction of the company.

Ben Graham in The Intelligent Investor famously stated “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” 

For me, a big difference exists in trading and investing. I once traded shares and I am now an investor in shares and other derivatives. There is a big difference in trading for a short-term capital gain and investing long-term for dividend yields; a capital gain is welcomed but not the primary investment factor. The preservation of capital is the primary investment factor with the dividend yield the secondary factor for investment decision-making.