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Is Investing Gambling?

There is a thin line that differentiates investing and gambling.

We might consider professional gamblers—poker players, for example—a breed of speculative investors. Of course, we might also call investment professionals who take wild risks in financial markets gamblers. No matter how skilled the card shark or how practiced the investing maven, one thing is certain: in cards, as in the stock market, there are no guarantees.

Whether we gamble or invest, we take risks in pursuit of potential rewards.

We risk a dollar on a lottery ticket for a potential to win ten million dollars, we risk $25 on a hand of blackjack for the potential to double our money, we risk $5,000 to buy a penny stock for the potential it will triple in three months, or we risk our life’s savings in the stock market for the potential to earn consistent annual returns.

Each risk carries vastly different odds (and potential returns). At the one extreme, the odds you will lose your dollar is good; of winning the lottery, not so good. On the other extreme, the odds of making a modest return on a long-term investment in the stock market is good; the odds you’ll lose a chunk of your savings is much lower.

But are investing and gambling the same? Let’s use an example to find out:

How Three People See Risk

The following describes the attitudes toward gambling and investing held by three individuals: a close friend, my sister, and I.

L (My Friend)

  • The Gambler: L became an avid poker player after learning the Texas Hold ‘em in school. He would attend casual tournaments with buy-ins of up to $20 on a regular basis. Also, L funded an account for online poker with at least $400.
    The Investor: L took much interest in the stock market in college as well. He started off small with about $1,000 in a brokerage account. By his senior year, he had an account valued at about $60,000, made possible with $20,000 in margin and $15,000 in credit card balance transfers. Obviously, L doesn’t mind risking borrowed money if he believes it can earn a return. Likewise, L believes it is naïve to leave money in a high-yield savings account if the stock market can offer higher returns.

J (My Sister)

  • The Gambler: J has proclaimed that she would never play poker with real money, although she has played a few games “for fun”. J wants to understand the game and enjoy it with friends, but refuses to wager real money.
    The Investor: J does not own any investments whatsoever. Her ideal method of building wealth is a stable, high-paying career. She has shown interest in the stock market and even built a virtual stock portfolio, but that’s where her investing stops. Instead, J funnels most of her cash into her safe but stagnant high yield savings account.

Myself

  • The Gambler: Though I am fond of gambling, I rarely put real money down. Aside from occasional friendly poker games, I have only participated in a few “real money” tournaments, none with a buy-in of more than $5. I too caught the online poker bug a while back, but I only funded an account with $25.
    The Investor: I am a conservative investor, but an investor nevertheless. I have roughly $3,000 in a Roth IRA invested in mutual funds and ETFs, nothing yet in individual stocks. I believe investing is necessary in order to prosper, but I take the safe approach by investing in index funds.

This evidence is anecdotal, sure, but I believe that the way a person gambles can predict how that person will invest, and vice versa.

So What?

The parallels between gambling and investing are interesting, but you’re probably starting to ponder a very valid question: Why should we care?

Because we can use the similarity between gambling and investing to measure our own ability to stomach risks and, as a result, make better investments.

Take, for example, the following ubiquitous investing advice:

Your portfolio should reflect your risk tolerance.

That makes sense, but how are you supposed to know what your risk tolerance is? There’s the general rule of thumb that you want less risk as you get closer to needing the money you have invested (in most cases, retirement). But that’s just the start. No two investors are the same.

But if you like a little gamble in your life, in other words, you’re the type who sits down at the blackjack table instead of watching over your friends’ shoulder, chances are you’ll enjoy the ups and downs that come from riskier investments. On the other hand, if dropping a quarter in a slot machine seems like the most foolish use of 25 cents you can think of, you might be more comfortable with conservative investments.

Obviously, the smart investor strives to make sure even aggressive investments are more than just gambles. And a gambler should know that house always wins and that gambling is entertainment…not an investment. Still, the parallels between Wall Street and the Las Vegas Strip endure…and continue to intrigue.

How does your gambling attitude compare to your investing mindset? Does your risk profile for investing deviate from that of gambling? Share your thoughts in a comment.

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

Comments

  1. Value investing where you buy and hold cash flowing (dividend) stocks is much different than day trading or speculating on penny stocks…. there are so many diff forms of “investing” or trading that its tough to say.

  2. There is sometimes a fine line between the two. There are those who would consider the use of options gambling. On the other hand, there are strategies which will guarantee that over a certain period you won’t lose any principal (e.g. buy a 10 yr zero coupon bond to replace your cash today, and invest the difference in a mix of out of money options.)

    BTW – how is J an investor when only keeping cash in a savings account? She staying ahead of inflation?

    • Economist Joe says:

      J IS a gambler/investor.

      All investing is gambling. No fine line.

      Anyone who hands over their money to another person with the promise of a return without a guarantee is a gambler.

      When J puts her money in the savings account, she is hoping that: a) The dollar remains relatively stable and strong; b) that the institution where she opened the account will remain solvent; and c) that the FDIC will pay her if the institution fails.

      With all three conditions, there are NO ABSOLUTE GUARANTEES.

  3. @JoeTaxpayer: I was speaking of their gambler and investor “mentalities”. J is actually neither of the two.

  4. I view poker as an investment alternative that most do not have. I started with $100 about a year and a half ago, and now have profited over $2000. Not everyone has the ability to do this, so don’t think I’m endorsing this as a way to make money. (Not to mention, the hourly rate is laughable thus far.)

    Poker requires strong analytical skills, reasoning abilities, and mathematical aptitude, and these abilities are invaluable for active investors as well. Combine the above skills with a desire to let one’s money bring strong returns, and you have the connection between playing poker as a true investment and investing in the markets.

    Taking an active role in your finances (I’m not too big of a fan of automation, other than splitting direct deposit to multiple accounts), from debt reduction to daily budgeting to long-term investing, logically should yield better results than setting your financial ship on autopilot. However, a person who is active with debt reduction and budgeting will do better with auto-pilot investments than high yield savings.

    Ultimately, though, I think it’s important to follow the ubiquitous advice above: “Your portfolio should reflect your risk tolerance.”

    P.S. I include a poker account in Quicken so that I can track my investment performance alongside the rest of my portfolio.

  5. Simon, my investment / gambling attitude is somewhat similar to yours. I see gambling as a form of entertainment – something I will do IF I can afford to do so. Just like I don’t expect to receive a monetary return when I go to the movies, I fully accept the (rather high, for me) possibly of leaving the blackjack table with absolutely nothing.

    In regards to investments, however, if I don’t expect to receive a return, it’s not likely I’ll invest in it. To me, gambling is throw away money, and if I make a buck or two, good for me. But only the small majority of my investments are considered “high risk”.

    Where my attitude towards the two are similar is that prior to investing or spending on entertainment, I will always make sure my monthly expenses are covered and that my “emergency fund” (liquid savings of 4-6 months’ worth of expenses) is in tact.

  6. If you dont take the time to look at a company’s financials before investing in them then you would be gambling with your money. I would also argue this if you just chose a mutual fund and stuck your money into it without checking its track record. If you do your homework (aka view balance sheets) of prospective company’s then you can invest invest long term with relative certainty that you will make money.

    One other point to make is that for someone to win at gambling, someone else HAS to lose. You are profiting off of someone else’s misfortune. Some may make the argument this would apply to the stock market but it is more supply and demand. If no one will sell you a stock you seek at a certain price then naturally the price of that stock has to go up to meet the supply price.

  7. I agree with Brad. “If you dont take the time to look at a company’s financials before investing in them then you would be gambling with your money.” You must give lots of attention to it.

  8. Yes, i think however ppl try to make investing and gambling diffrent but its know different it’s still chance or taking a risk…However u put it. It a chance, and if it was a sure thing evreyone will be a investor. Investing is another word for gambling.. i think

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