Is gambling a form of investing? This article is going to investigate.

While investing and gambling do share one major feature in common, namely risk, the similarities pretty much end there: With traditional casino games, your expected return is negative (typically between -½% to more than -5% on each wager, depending on the game). Gambling is defined as staking something on a contingency. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many traders are gambling.

You may have heard people in the past talking about how gambling is similar to investing in the stock markets. This is true to some extent as both risk money in order to make more than they started with.

There is more to it though. Both investing and gambling require knowledge of what they’re either investing or playing, otherwise there is no way that they will profit.

It’s also important for both an investor and a gambler to pay attention to how much capital they are willing to risk. If it’s not managed properly, it becomes more likely they lose bigger than they should.

It can be seen already that investing and gambling are quite similar. But how and why are they considered different?

To get to the bottom of this, it’s important to first define the terms ‘investing’ and gambling.

What Is Investing?

Investing is committing funds to a certain asset with the expectation that it will grow in value to make a profit. The important word here is ‘expectation’. Investors make their money expecting, rather than hoping, that their assets will increase in value.

Investing requires an understanding of risk and return: investing in low-risk assets generally means that returns are expected to be low, while investing in assets at higher risk generally means that returns are expected to be high.

It always comes down to how much an investor is willing to risk in their asset. The standard amount is usually around 2% of their total capital per trade.

To gain an advantage and make money, traders study the markets and current affairs to get a better understanding of their movements. For example, they will look at their charts and look for patterns that have happened in the past and use their results to predict how the current asset price will move.

This process is known as technical analysis.

Is Cryptocurrency Gambling Or Investing

It’s also important to note that an investor’s returns can sometimes be affected by the commission they pay to a broker that buys or sells their assets on their behalf.

Finally, investors own a part of the company they are investing in.

What Is Gambling?

Gambling is the act of staking money on a contingency rather than an asset. It involves risking money on an event with the hope that it makes money.

Straight away, this definition shows a difference between gambling and investing. Traditionally, gambling has no certain outcome and relies a lot on chance.

But there are ways to reduce the risk, such as creating a data-driven strategy. Particularly in used in sports betting, this involves analyzing the results of previous games, creating a theory and then backtesting it to make a profit.

Like investors, gamblers should also keep an eye on how much capital they are willing to use per bet. For example, in card games like poker, pot odds are a great way to determine risk versus reward during a hand. When the odds are in the player’s favor, it’s more likely that they will call a bet.

For casino games, gamblers play against the casino itself, known as ‘the house’. In sports betting, while they are in theory betting against the house, it’s the other players that determine the odds of the event they are betting on. The more money that goes on one side of the betting line, the shorter the odds become.

Gamblers are commonly faced with situations where they do not expect to win. For example, in blackjack, when the dealer is dealt a ten and the player is dealt a six, the chances of winning are slim.

So, here are some key takeaways from these two definitions:

  1. Both investing and gambling risk money in an attempt to make a profit.
  2. Both investing and gambling use tactics to minimize risk.
  3. Both investing and gambling can use resources to improve accuracy.
  4. Investors have more resources available to mitigate losses.
  5. Gamblers play knowing that the odds are not in their favor.

Mitigating Losses

This is an interesting topic.

Investors have multiple ways to prevent them from losing too much of their capital. One such method is by setting stop losses on asset investment. If the price drops below 5% of the purchase price, there is an opportunity to exit the trade and sell that asset to someone else, retaining 95% of the risk capital.

Now, in terms of gambling, some people will argue that there is no way to limit losses. An example they will use is taking part in an office sweepstake, where everyone pays a fee in exchange for drawing a random competitor. If the price is $10 and the team loses, the gambler is said to have lost everything.

However, this logic is often misguided.

In reality, professional gamblers employ a strategy called bankroll management. It involves only betting a certain amount of gambling capital per bet and ensures that even if bets lose, they don’t go broke.

Most bankroll management strategies can ensure that 100-200 bets can be made at their particular level. For example, if someone regularly stakes $10 per bet, they will have at least $1,000 in gambling capital.

If the gambler goes on a downswing and loses the majority of their bets over a certain period of time, then they decrease the amount they bet per event to ensure they can still make between 100-200 bets at that level. So, using the previous example, if someone betting $10 per event goes on a downswing and they lose $500, they would reduce their betting amount to $5 per bet.

So all in all, this is actually a similarity between the two ways to make money: both gambling and investing have ways to mitigate losses.

Edges And Value

It was established that both investing and gambling use methods to mitigate risk and maximize the chances of making a profit. However, in the case of gambling, the house always has an edge over the player.

On the other hand, investments tend to appreciate in value over time.

Now, this does not mean that gambling can not make a lot of money, nor does it mean that investing in assets always guarantees a positive return.

While the odds always favor the house, it’s important to seek value from bets to maximize returns.

The term value refers to getting the best odds and making the best play based on the information available. In sports betting, this could be in the form of a heavily underpriced underdog, while in poker, it refers to making a bet with the assumption you have the best hand.

Time

Time is another difference between gambling and investing. Gambling is constrained by time. While online casinos can keep you gambling all day and night, no matter if it’s a hand of poker or a horse race, it comes to and at some point or another.

When the event finishes, the opportunity to profit further also comes to an end. Either the bets have won or they have lost.

On the other hand, investing in assets can be rewarded by time. When an investor enters a trade, it will go on for as long as that asset is real. For example, if the asset was stock in a company, the trade could, in theory, continue until the company is sold or goes bust.

One way is when investors are paid by companies that they have invested in with dividends. No matter what happens to the value of these shares, the company pays money to the investor in return for the investment.

While it’s great to make money from the appreciating price of the asset, it’s even better to be rewarded for simply investing in the first place.

Gathering Information

Both gamblers and investors can improve the success of their trades by looking at past results and comparing them with current performances. Information is the most valuable tool for both investors and gamblers but there is a difference in terms of how much is available.

Investors can gather information from a variety of sources, such as company reports, financial institutions and, for stocks and shares in particular, even through researching the people running the companies before having to commit a dime to the investment.

The same goes for sports betting. Professionals can find data that affect the results, such as the weather from historical websites and sports news companies. Similar to investors, they can put all this information into a strategy before betting anything.

However, for some casino games, even if you do all the preparation in the world, there is no information about what happened at the table earlier in the day that can help to make a decision during play.

Addiction

Now, to most people reading, their minds went straight to gambling addiction. Why? Because it’s assumed that there is no such thing as an investing addiction.

This isn’t strictly true.

Of course, compulsive gambling is a problem that must be addressed. Organizations like Gamblers Anonymous help people overcome their addictions. But there is no such thing as Investing Anonymous, while there are never any news reports detailing the effects of compulsive investing.

Addiction to investing does exist. It’s just seen as a financial problem, rather than an addiction.

People who invest online are prone to checking their investment portfolios on a very regular basis. They will also make multiple trades more often than they probably think. This can get very expensive: not only are they paying a lot in commission to brokers, but they are also investing a lot of energy.

There are also investors that risk capital more aggressively than they should. If the wording was changed to ‘gamblers betting more money than they should’, it clearly points to a problem.

Risk-Adverse Vs Risk-Seeking

Gamblers and investors rely on taking risks to make money. Granted, some investments like government bonds held to maturity don’t have much, if any risk attached, but then again, they are prone to the risk of inflation.

The difference lies in the individual’s willingness to find and accept risk. Investors don’t tend to take risks unless there is a large reward, whereas gamblers are forced to take risks with every bet.

There is a notion though that gamblers often take risks that they shouldn’t, while investors do not. Like many of the topics discussed, this is not necessarily true.

Here’s an example.

An opportunity arises where an individual is presented with the following opportunity: they can either take $100,000 right now or risk $1 million on a 50/50 chance.

The obvious, most common response is that taking the 50/50 means the individual is more of a gambler. After all, they are passing up the opportunity of $100,000 without having to risk a thing.

But looking at it objectively, the individual needs has odds of 10/1 to improve. To profitable make this investment, they need to be right 10% of the time. In a 50/50, they are right 50%, so they have 5x more equity needed.

Is this a gamble or a good investment opportunity? One could argue either way.

Of course, gamblers that think this way are different from those that are heading to Las Vegas for the weekend looking for a good time. Those that look to justify their bets before making them act more like an investor.

Conclusion

Gambling and investing are more alike than most people think. They both require careful management of capital, using resources to make their trades and plays more accurate, while also having the ability to give an individual financial freedom.

But of course, they are different. Investors are not limited by time and gamblers do not always have the luxury of using past information to help them make informed decisions.

Stock Market Gambling Or Investing

One thing is certain though: whether it’s via investing or gambling, it’s important to understand the purpose of each trade and bet. Otherwise, it really does become a game of chance.

TLDR? Gambling and investing are similar on the surface, but they are differentiated by key differences in how risk and probabilities of scenarios play out. Gambling returns a net zero, whereas investing can lead to sustainable gains over time.

Hey guys, welcome back to another week here on My Money What. Today, we are going to talk about a topic that we’ve heard thrown around lot:

Side note. (When I was thinking about the concept behind this post, several ways of tackling it did occur to me. I could go down the typical route and talk about how a person needs to understand the investments they are buying. Or some variation of this idea. This has been repeated ad nauseum, and I am taking a different approach. Hope you enjoy it.)

No matter who you are, if you live in a capitalistic society, you have come across this, “Investing is Gambling”. For me, I’ve heard this meme countless times in my life, and these instances are forever seared into my memory.

I feel a genuine ire when these misconceptions about investing are thrown in my face like they are a representative of the nature of the world. However, it also sparked a genuine curiosity in me. “Why is it that so many have such similar ideas about investing?” I wondered.

And so, I spent some time pondering and reflecting about the abovementioned examples of how others view investing. Clearly, there is a lot of cultural angst (fear) that we as a society carry towards it.

After giving it some thought, I arrived at a conclusion. I think that for every individual who has been turned off by investing, there is a history of “trauma”. A history of deep personal loss that leads to strong feelings of aversion. The thing about trauma is that, the event of deep loss could have happened to anyone. It could have happened to you, a family member, or even someone close to you. Either way, you experienced/saw how someone “invested” and was instead led down the path of financial ruin.

Off the top of my head, here are some of the examples of financial loss that I others told me about:

  • How some families have been ruined over how a head of household “invested” (really, speculated and gambled) in the stock markets
  • The recurrent horror stories about how people lost their life savings in Great Crises that happen time and again
    • The Great Depression
    • The Asian Financial Crisis
    • The Dotcom Bubble
    • The Great Recession
    • And on and on and on

I get it. When someone is traumatised by a negative event, they seek to avoid making the mistake that brought them there. You see, the thing about financial stress is that the bleeding never stops with just money woes alone. Money woes are often the beginning of all sorts of unhappy things:

  • Divorce (money woes are the number two reason for divorce)
  • Families breaking up
  • Kids growing up with a chronic sense of scarcity; etc.

All sorts of happy things stem from money-related woes. And so, these people may develop a genuine aversion and fear towards investing. They then build up memeplexes (mutually reinforcing ideas) that “protect” them against the potential of financial ruin. These memeplexes include ideas like:

  • “The market is fixed and controlled by the large banks, institution and politicians who only use it to enrich themselves. Small fish (individual investors) best not get involved and get eaten by sharks.”
  • “Look at how the market is a mechanism for fraudulent activity.”
    • This is usually said in response to incidents of financial fraud being unveiled.
    • Incidentally, some seem to have this weird conception that the rich only got rich because they participated in some “dirty business”, whatever that means.
  • “It’s not good to gamble.” (The thesis of this post.)
  • “How much you earn and lose in the market is controlled by a completely random process.”
    • I suspect this is based off of a very superficial understanding of the random walk theory. (We will discuss random walk in another post).
  • “Putting too much money in the market is equivalent to taking on too much risks. We should be putting money into fixed deposits or leave it in our bank accounts instead.”
    • This most recent response was what prompted me to write this article.

What’s unfortunate about these memeplexes is that over time they become deeply entrenched in the minds of some. Because of this fear and entrenched mindset, they prevent people from developing an understanding about how investing and capitalism works.

Your Responsibility to Learn

To me, the solution is simple (although not necessarily easy). A person has to work towards developing an understanding of investing and capitalism if they would like to thrive money-wise. (Stick with us, and we will bring you through all the way eventually).

Keeping money locked away in a vault of guarantees is akin to trying to protect your children the negative things in life. (If you don’t have kids, just imagine for a second that you do). Not only will they not develop to their full potential, rather, they become diminished because of it (due to inflation).

Your money, like your children, need to grow. Just like our children, there is no other hand that can guide it but yours. No one is more interested in your future wealth and the future of your kids more than you are. What you hold in your hand, therefore, is a responsibility towards your own future. What better to guide your money through the unpredictable ocean of life, than the hands of a seasoned, knowledgeable sailor?

Rise up, take the wheel, as fearful as you may be, and learn to steer. You got this. To help you along, let us begin by understanding the similarities and differences between investing and gambling. So that we can identify the instances where we are gambling, and the instances when we are not.

Investing vs Gambling?

Investing Or Gambling

To tease apart the two, let’s begin by understanding how the activities of gambling and investing are superficially similar. As we go along, we will also discuss how the two activities are different, and how they don’t lead to similar outcomes.

Investing and gambling are both activities whereby:

  • There is a sense of anticipation and excitement that arises out of participation in either activity

1. For Investing and Gambling, there is an Inherent Uncertainty about the Outcome

In participating in investing and gambling, one has to accept that there are no guarantees.

Let’s take a look at gambling first. Suppose you were playing a game of dice. Every time you roll the dice, you are equally likely to access one out of 36 outcomes. (The more complex the game, the larger the number of outcomes). Regardless of the type of preferred gambling method, however, the outcomes are by and large equally-weighted and random in gambling. (Some would argue that other forms of gambling, like blackjack, allows you more control over the game. That’s true. IF you actually get good at tricks like card-counting. And, IF casinos did not actively ban and blacklist card counters.)

Conversely, when we talk about investing, , there is potentially an infinite number of scenarios that may play out. This is because there are many moving parts in a company (or a financial product). An employee might not follow company guidelines; there might be fraud; management might not decide to stay; the company may be outcompeted; the sector may become uncompetitive; and on and on. There is always going to be some scenario that might occur for which you are wholly unprepared for. Because of this inherent uncertainty, you are never guaranteed to make money as an investor.

To those with a preconceived fear/ignorance/prejudice against investing, I know that I am not helping with your anxiety. But! (And there is a huge ‘but’). The main difference between investing and gambling is that in investing, the odds outcomes occurring is not equally-weighted. Depending on factors that an investor can discover with his or her investigative or due diligence process, the investor can weight outcome probabilities ahead of time; conduct their discounting process (aka incorporation of risks into their investing model); and decide if they would like to enter the deal or not. Such a level of control and understanding is usually absent in gambling.

Which brings me to similarity number two.

2. In Investing And Gambling, You Risk Some Money Hoping To Gain More

Gambling and investing are activities which involve putting some money at risk with the hope/expectation to gain more. The difference between the two is that in gambling, or equal-weighted/random scenarios, you are hoping to gain more. On the other hand, in the case of investing, a competent investor always expects to gain more.

There is a crucial distinction here. In equal-weighted/random scenarios, such as gambling, the long-term gains from continual participation is a big fat net zero. (When you incorporate the fact that the odds of winning at casino games are heavily skewed in the casino’s favour, this works out to a net loss for the participant, and a net gain for the casino.)

Conversely, in investing, because of the process of investigative work, the size of the potential gain scales with:

  • Probability of favourable scenarios versus probability of unfavourable scenarios
  • Size of the opportunity
  • Position size that the investor takes

The idea here is to minimise the downside, while trying to access the upside. This allows the investor to achieve a net targeted rate of return. (Interested readers can see this principle at play as discussed in the previous article on bonds).

However, even if you don’t do that, you can access a long-term rate of return just simply by investing in low-cost index funds. Index funds are a pretty neat investing vehicle which requires much less work, while returning you a nice rate of return over time (as discussed in our article here).

3. There are Factors Outside of Your Control

I feel this point of there being factors out of one’s control is related to point one. The factors being outside of our control in gambling also relate to the equal-weightage or random nature of gambling. For investing, on the other hand, the factors that are outside your control can be mitigated. One simple way to do this is to diversify. By diversification, you can access alternative companies, sectors, and even countries.

In investing, diversification really is a magic pill that protects you from unsystematic risks associated with any investing position. (However, do remember that too much diversification may lead to mirroring the market at a much higher cost than you need to. There is such a thing as too much diversity.)

“Diversification is a protection against ignorance.”

Warren Buffett

There are two ways to see this quote – (A) That diversification is for those who don’t know much about what they are doing in a negative sense. Which means that one should improve their knowledge about investing. Or; (B) In a positive sense, those who don’t know much can seek shelter in broad market returns.

4. There is a Sense of Perceived Anticipation and Excitement that Arises out of Participation

Because of the two activities involve some possibility of making money, there is often an air of excitement associated with them. (Who doesn’t like to make money? If you ever find yourself in such an unhappy position where you abhor the idea of making money, please drop me an email at [email protected]. My Money What, here for all your cash disposal needs.)

In gambling, the excitement arises out of the rush of not knowing whether the next hand or the next play is going to be the lucky one that finally pulls in the pot. And so, when gambling, you’re glued to the edge of your seat, always anticipating the next hand.

On the other hand, when investing, the excitement that arises is due to finding a hidden gem within the market. Although there is always that excitement when you turn over a hidden gem, good investing can be incredibly boring. In fact, there is an old adage:

“If you want excitement, take $800 and go to Las Vegas.”

Paul Samuelson (A Nobel Prize winning Economist)

Stock Market Gambling Or Investing

“Good investing,” it is said, “is like watching paint dry”.

Why this is the case is because, as much as possible, the investor removes luck from the equation. There is a calculated risk that the investor makes. Depending on the type of investment you make, your certainty about when the investment will deliver its promised value varies.

However, it is important to note that different investments provide you with different levels of certainty. Bonds and real estate fall into the category of being investments with a higher certainty of returns. This characteristic is inherent to the two investment vehicles since there is an immediately calculable rate of return.

Stocks on the other hand, can take some time to realise their value and deliver promised returns. Let’s take deep-value stocks for example. On average, deep value stocks take roughly 3 years to unlock their value. (We will discuss unlocking of value in a future article).

Honourable Mention: Speculation

Of course, there can still be some confusion as to what constitutes an investment, and what doesn’t. As alluded to the above, an investment has some qualifying criteria that I will restate here:

  • There is an expectation, not hope, of profiting when you invest
  • You can understand/discover probable outcomes with clarity ahead of time when investing
  • An investor can account for different outcomes either through the investing model or diversification
  • Homework and due diligence are the keys to successful investing

For beginning investors, please don’t make the mistake of speculating in the markets as investing. Speculation is throwing money in the markets without a clear idea of what you are doing. To be fair, the difference between speculation and investing is something that we understand when we gain some experience. However, to save you a lot of potential pain, I would like to highlight some examples of speculation to avoid. Beginners often commit these errors, including myself when I first started.

Some of examples of speculation are:

  • Trying to buy low and sell high.
    • No, stocks are not guaranteed to return to their previous price point. You can beg or even pray, it wouldn’t change a thing.
  • Picking a company at random, hoping it all works out.
    • Good luck with that. I hope it works out for you.
  • Relying on a “guru” to tell you what to buy.
    • AKA being the sucker in a pump-and-dump scheme (something we will address another time).
  • Chasing the latest hot stock tip and throwing your life savings in.
    • Oh, sweet innocent child. By the time a stock tip has gotten to you, the stock is likely in overpriced territory.

Make no mistake. If you do any of this, to me, you are not investing, you are speculating, and you are indeed gambling.

In summary, many have had a history of trauma with regard to investing. But, the faster we accept that and move on, the faster we move towards understanding the activity of investing. Learn everything you can about investing. Read articles that tell you the difference between investing and gambling (beyond this current one).

Ultimately, investing is both an art and a science. I often tell others, “Where the quantitative and qualitative factors meet, there you’ll find your story. A seasoned investor is someone who extracts and synthesizes the key aspects of each source of information. Doing so, he/she mitigates and controls risks. (Something that a gambler will never have access to.)

Finally, guard against speculation, for these have an insidious effect of looking like investments, even though they are not.

Gambling Or Investing

Investing

I hope this article helped, and I wish you a happy investing journey.

See you next week.

Forex Gambling Or Investing

Mr S.

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