Difference between investing and gambling

by Manshu on March 21, 2010

in Investments

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When we invest, we need to be realistic about our investment returns.  We should begin investing by assuming that our gains will be minimal.  When you do find yourself losing money, cut your losses before they become overwhelming.  Don’€™t be a perfectionist about each investment decision you make, but do a reasonable amount of homework so you know what you are getting yourself into.  There may even be times when it’s best not to invest.

One fallacy to consider is whether or not you treat your money like poker chips.  Are poker chips an asset?   They aren’t because they have almost no value outside of a casino.  A stock certificate only has value on the stock market — that is true, but its value is universally recognized.  Everyone in our society recognizes the value of a stock certificate. Anyone would recognize the value of your stock if you offered to sell it to them.  Now try taking your poker chips across the street to another casino, or better yet try selling your poker chips to your neighbor at your next BBQ.  It would’n€™t work because an asset is generally an item which can be bought and sold, whereas poker chips can only be bought and then cashed in, at one particular casino.

Depending upon the size of your bets, you can lose all of your money when gambling.  Investors can also lose all of their money.  However, a stock has three possible directions, up, down, or staying the same.  Has there ever been a time when a bet you made at a casino remained the same value?  When gambling, you either win or lose and the result is immediate.  An investment may go down, and then recover its value and climb beyond its initial value.  Investments are less likely to leave you with a total loss of your money, unlike a slot machine.

You can put coin after coin into a slot machine and lose all of those coins.  On the other hand, the same money saved up in an account at a discount broker that’s placed into a stock investment can yield a large return.  A win on the slot machines is not a payoff from an investment.  You bet a dollar and receive tens of thousands of dollars in return… that is a chance occurrence, and not a return on your investment.  The proportion is wrong.  When investing, proportions make a difference in the size of your return, usually.  In gambling, the payoff is out of all proportion to what you would expect from an investment return.  Consider what happens to a lottery ticket winner who wins millions of dollars by purchasing a ticket that only costs one dollar.  Is that return in proportion to the investment?  I don’t believe so.

All casinos offer games of chance for entertainment purposes.  While there is the possibility of a return on your money when you bet in a casino, your winnings cannot be considered an investment return.  Simply put, you cannot calculate your return on a casino bet, especially in a randomized game.  You don’t know how much you’€™ll make when you gamble.  Neither do you know for sure what you’ll yield from your investments.  The reason no investment is guaranteed is because no stock broker or financial advisor knows what the outcome of any investment you make will be.  But your return can be calculated with a reasonable guess.

Since there are 52 cards in a deck, any astute gambler can figure the odds of certain cards being played during the course of a game.  This poker probability is well known to those who take their gambling seriously.  Many players will take this knowledge into a casino, and win money at blackjack or poker.  Yet, is that kind of foreknowledge comparable to the types of foreknowledge an investor uses to approach the investment spectrum?  I would argue no.  Like gamblers who play their cards poorly, investors are at the whim of human fallacy and greatness, but that is where the similarity ends.  Casinos are run by wizards behind curtains, and in the end, the money you spend is only for fun.  Any returns you receive are by chance, and so cannot be considered investment returns.

Gambling, and not investing, is like an arm wrestling match; once the contest is over; there is a clear winner and loser.  Investment brokers house countless investors who are matched against hundreds of other investors just like them, who are also vying for the best returns they can get for their money.  The contest is only over when the investor sells their stock certificate (property.)  Their wins or losses are due to the investors’ efforts and not chance: how well did they choose their stocks, and did they have the fortitude to stay with that investment until the returns were positive?  The win or loss in investing is not necessarily immediate as in gambling.

Stock market wizardry is generally a mirage, with most investors finding that they are more human than magician.  Your gold rush will come from your own efforts, rather than by chance, and another hard day’€™s work of investing feels pretty satisfying.

{ 5 comments… read them below or add one }

Buzz B Berkeley March 21, 2010 at 8:09 pm

BS… Stocks, Bonds and Commodities are EVERY bit a gamble! While we’re at it, so is the meal you just ordered, the spouse you chose, the career you’ve chosen, the insurance you bought, the shirt you’re wearing…. EVERYTHING’S a gamble!

And, if you take the overly simplistic stance that your gamble on the tables can’t remain the same (no change in value) then you clearly don’t know much about table games at the casino. Get informed before you open your mouth – to do otherwise is too much a gamble!

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ctreit March 22, 2010 at 9:41 am

Ok, I buy it. There is a big difference between gambling and investing but I would like to say that the biggest difference lies in the larger picture. If the economy grows and you invest in the “stock market” (not in single stocks), you make money. There is no such correlation in a casino.

But I think that for the average investor – amateur or professional – investing in single stocks and playing roulette is very similar. It is not just the case that “their wins or losses are due to the investors’ efforts and not chance” as you say. Investing in single stocks is pretty chancy. There is so much information that needs to be processed and evaluated correctly when you pick stocks that even a large majority of professional fund managers cannot pick good stocks consistently.

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Buzz B Berkeley March 22, 2010 at 6:14 pm

@etreit – if you insist on using Roulette as the comparison, then consider betting on several stocks – or several numbers – not just one….. same thing – just quicker results (unless of course you’re a day trader).

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john elway October 4, 2010 at 10:21 pm

What a fool. Investing IS gambling. The different is time. Investing usually take longer to achieve while gambling is very quick. But given the Internet, investing is very much like gambling now. Worst thing about investing is that there’s no limit like the casino. You hear story about man losing thousands at the casino, but you hear worse at the stock market where man lose billion! And by the way, Day Traders are gamblers!

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Pat June 18, 2012 at 9:04 am

The most practical reason casinos are necessary in society is to enable the public (and business) to distinguish between gambling and investing.

Where there are no casinos, the tendency is to presume that banking, the stock and commodities markets, free trade, and industry are casinos, not investment markets – which is what essentially has taken place over the last 15 years – especially with the banking bail outs from the subprime mortgages schemes, and hedge funds.

Regulations meant to protect business markets from becoming casinos for white collar crime is in the public interest, and is meant to prevent government from aiding and abetting what otherwise would be private interest in indulging a kleptocracy for the private good.

The 2012 election is nothing if it isn’t about these fundamental views of how people view government and what its purpose is – to provide for the public good, or to be used for private interest kleptocracy. The distinction remains the dividing line between the GOP and Democratic lens as the kaleidoscope of government’s role in America as related to the American people.

If not for the public welfare, i.e., the public interest, what possible purpose could government have, and who needs it at all?

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