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Investing and gambling as you are aware are two different activities but the general perception is such that people sometimes tend to confuse the two activities. This perception however is not without reason as there are plenty of similarities between the two activities. For starters you definitely need luck if you want to be a successful investor or a gambler; in fact you need a bit of luck in everything that you do. So let us now look at some key characteristics of both investment and gambling and see how these two activities fare along.
Time Duration
Time is one of the most important factors when you talk about investment or gambling. Let’s talk about investment first. As we discussed in the previous article, an investor needs to determine if they are going to invest their funds for the short term or for the long term because the strategies for both time durations will be different.
Investors, who favor short term investments, have a high stake investment strategy that can be considered very similar to a gambler. When you go for short term investments, you do not have the luxury of time, data and course correction on your side. For example day traders try to take advantage of short term price fluctuations and movements to make profits on a daily basis, now this sort of trading requires specialized knowledge about how the market operates. Traders usually use specialized trading softwares to help them monitor all the data so that they can make informed decisions in order to minimize the risk of loss.
However the problem with short term trading is that you cannot predict the future. Day traders are therefore forced by the nature of short term day trading to take reactionary measures because there just isn’t enough time to forecast the trends. Look at the March 2020 financial market crash for instance. When the markets began to crash due to the pandemic and oil price wars, the majority of investors and day traders jumped into the stock selling frenzy after reacting to the news of lockdowns. This reactionary approach led to a major market crash almost across the globe. This is the biggest drawback of short term day trading, short term traders or investors do not have enough financial cushion to ride out the storm whereas the long term investors can ride out the storm by holding on to their investments.
As Warren Buffet and other investment gurus say “buy the dip”, they wait for the markets to crash to buy cheap stocks and build up their portfolio. Long term investors take advantage of the long run mean reversion of the market. Mean reversion refers to the property of the markets to return to an average rate of return in the long run. This means that the daily fluctuations, market highs and crashes do not matter if you look at the long run rate of return, as it is almost always constant.
Gambling on the other hand can be said to be very similar to short term investment as compared to long term investment. Let’s get one thing out of the way first, there is no concept of long term gambling. If you are a gambler then you cannot bet over a period of say one or two decades whereas long term investors can invest their funds for many decades. Gamblers simply do not have the luxury of time on their side. The very point of gambling is to earn profit/wager/bet or whatever you want to call it in the short term. The words long term and gambling are antithesis of each other.
What about short term investment or day trading then? In a sense short term investment is similar to gambling. Gamblers rely on odds, probability, experience and luck to win bets and short term investors or day traders relay more or less on the same things. Yes day traders also have trading strategies that are based on financial models and quantitative and qualitative data but it does include an element of probability, chance and luck. It would however be wrong to equate short term investment and gambling.
Research, Data and Patterns
This is where investment and gambling differ from each other. Investment done by professionals is almost always based on prior research, input of qualitative and quantitative data and past trends and patterns of the markets. This makes investment a very dynamic activity. For investment at the start of 2020, the economic outlook for the year was positive and the tourism and real estate sectors were expected to do quite well, however the outbreak of Covid-19 pandemic has impacted these two sectors the most. This information has directly affected investment decisions of millions of investors across the globe. In order to be a good investor, one has to study the patterns, know the data and market condition.
Gambling on the other hand is less about data and more about chance and probability. To a certain extent advanced statistical knowledge can be used to find out favorable positions but in the end it comes down to probability. The probability of pulling an ace out of a pack of cards in the first draw will always remain 4/52, the chances of doing well at any game of cards for that matter, will always depend on the type of cards that you get. Your skill as a card player or gambler is secondary, the primary factor that`ll determine your success rate will be the quality of cards that are drawn for you, so gambling is to a very great extent dependent on chance and sheer luck.
Non casino based gambling such as betting on sporting events like who will win the super bowl or the football world cup or betting on political events like who will win the U.S Presidential elections in 2020 also include probability and chance but gamblers can use qualitative and quantitative data to make more informed bets and this would therefore be similar to investment. However with investment, investors can be sure about the profit that they will make to a very great extent whereas with gambling there is always an element of uncertainty till the contingent event comes to pass.
For instance if a football match happens between two teams one of which is an underdog, you can bet with a high degree of confidence that the more experienced team will win, however there is no certainty in this bet. The past statistics can go wrong and the underdog can always win. The 2016 season of the English Premier League is a testament to this when Leicester city became the champion. Compare this to a company that has got carried forward losses, bad liquidity and dropping sales revenue, with these indicators an investor can be certain that this company is not worth investing in, unless the indicators improve.
Informed vs. Uninformed decision making
We have already established that if an investor undertakes informed decision making to invest their funds, they are likely to achieve their targets and informed decision making differentiates investment from gambling.
However, not every investor does this. Yes, there are a lot of amateur investors who do not understand the intricacies and technicalities of investment and they try their luck with minimal market knowledge and data, this can be considered uninformed decision making and is closer to gambling, in fact one can call it gambling.
Why? Because the less data you have before you invest, the more your decisions will be based on pure guesswork thus making your investment technique a form of gambling.
Zero Sum Game
Investment is not a zero sum game, whereas gambling mostly is. Take investment in shares for instance, if the price of shares rises then this means that the company the shares belong to, is doing really well and this also means that every shareholder has experienced a similar rise in wealth. Therefore when the share prices rise, every stakeholder benefits. Whereas in gambling there is almost always a winner and a loser, there has to be a bet against something, if you bet on a horse race then only one horse can win and so those who placed their bets on other horses will lose the bet.
To conclude this discussion it can now be said in light of the argument presented above that investment and gambling are two different activities that have got some similar traits. Moreover, investment can potentially be termed gambling if it is carried out without relying on data and market knowledge. So while investment technically isn’t gambling, it can still be seen as gambling if an investor relies on guess work instead of data, patterns and sound strategies.
