The difference between Investing and Gambling

The difference between Investing and Gambling

An investment is where the odds are in your favour. An investment usually has an income stream and it also tends to be long term.

So buying a property to rent out to tenants is an investment most of the time. Over the long term, it is expected to rise in value. You will get a stream of rental income from it immediately. Buying shares in Bank of Ireland is an investment. Over the long term, they can be expected to rise, and you will get dividend income.

Gambling is where the odds are stacked against you. Betting on horses with a bookmaker is gambling. The odds are constructed so that the bookmaker makes a profit. Very short term buying and selling of shares is gambling. You might just be lucky and win, but most of the time you not make enough money to cover the fees and commissions.

With gambling, there is usually a “house” involved. A casino, a bookmaker, or a spreadbetting company. They set the odds so that they will win, although some few individuals will beat the house from time to time. The house does not need to take any risk itself, so betting exchanges like Betfair match bets and take a cut from the winner. This is much the same way as poker in a casino works.

Some important points

Investing is not risk free. In the short term, prices do fall and you will have paper losses. There might be a sustained long term reduction in values in property or the stockmarket. Or you might just choose a particular property or portfolio which declines despite the overall rise in the market. However, on balance, you have a very high expectation of making a profit over the longer term.

Investors tend to have a balanced approach to risk. They seek to manage risk by diversifying. They understand that there is a risk that Bank of Ireland might lose a substantial part of its long term value, but they will be compensated for this by other shares in the portfolio.

Gamblers are attracted by the buzz of risk. They like watching horses, daily movements in shares, numbers of goals in a football match. They are willing to pay for that buzz.

Some gamblers win. With millions of people spread betting and backing horses, some few are bound to have a good run. However, there are very few who are consistently beating the odds over the years.

Spreadbetting

You may disagree with the above definitions of gambling and investment. But the most important thing to understand is that you can expect to lose money when you get involved in spreadbetting. The house has a spread. It appears very small, but you do have a small expected loss per bet. The more you bet, the more you lose.

It is argued that you are not betting against the house, but that they are matching bets against other punters. So what? There is a spread. Someone else is getting it and not you.

If you want to make money by spreadbetting… Buy shares in the spreadbetting companies.

Spreadbetting is discussed in more detail in this thread

Interesting discussion, I think the difference centres on 2 points, already mentioned above:
Risk. I think there is a perception element here, at a certain point an investment becomes so risky as to become a gamble. This point can be different for different people.
Zero-Sum. This is less subjective, if "value" is being created, products sold, profits generated then this is real growth/return. If the return/win comes directly from some one elses loss (minus comission!), then it's a zero-sum game and gambling.

Positive Sum - Creates Wealth

Stock market
Property

Zero Sum - minus Commisions, etc.

Spreadbetting
Poker
Options

Negative Sum

Roulette
Horse racing, sports betting, etc. against a bookies
Blackjack


With the first group you can have little knowledge and still have positive expectation. In the second group you need an edge to make money, without knowledge you're at best breakeven and very likely to be losing money. In the third one you need a huge edge, ability to count cards, expert horse racing knowledge, etc. to have an edge and in some cases you're guaranteed to have negative expectation.

The first group I'd call investing, the third I'd call gambling unless you can prove how and why you have an edge.

The second group doesn't fit neatly into either category imo.

RedJoker said:

With the first group you can have little knowledge and still have positive expectation.

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I don't follow your logic RedJoker. What does expectation have to do with it? You include stocks in the first group and are comparing them against spread betting, surely this is apples and oranges?

I might expect that a stock will rise in value and use spread betting to invest my money in this expectation, if the stock gains in value, where is the "zero sum?"

Fascinating debate, Boss, but why is it not in the Great Debates?
I agreed with everything in your topic opener, but I think you rather lost your way in the ensuing debate with keyboard.

Brendan said:

Very short term buying and selling of shares is gambling. You might just be lucky and win, but most of the time you not make enough money to cover the fees and commissions.

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As I understand them, CFDs ("Casinos For Delinquents" - the Senator) are identical to spreadbetting - short term punts on the market. At least the caption "spreadbetting" makes no bones about it.

You seem to argue that underlying CFDs is an inherent windfall profit generator (the shares) that will grease all the delinquents' paws. Again, as I understand them, that's not how they work. The cash transfers on settlement are between professional delinquents on either side of the casino, just like spreadbetting.

If a CFD could be held indefinitely and the only costs were the implied costs of borrowing, I might accept your reasoning.


Finally, I am not sure how transactions in a second hand market can ever add value. The underlying entities may well be adding value but a second hand transfer does not. If the buyer picks up windfall economic benefits the seller has lost them - zero sum game. It's all to do with the price.

Hi Harchibald

If a CFD could be held indefinitely and the only costs were the implied costs of borrowing, I might accept your reasoning.

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I understand that is the position with CFDs. They are open ended.

In practice, they tend to be used for short term punts, so in practice they probably are gambling.

But if I decided to construct a balanced long term portfolio of CFDs, then I think it would be investing.

I note your point about the second hand market in shares. And trading in shares is gambling. However buying a portfolio of shares for the long term is investing, whether you buy those shares in an IPO, in a rights issue or from another investor. Most investment property is bought in the second hand market. It does not take from the fact that it is investing.

Brendan

Hi Brendan, where do brokers' fees and fund charges fit in with investing? Do they not constitute a house 'spread'?

Based on this, does it not mean that the ordinary punter can only bet (whether they are in for the short or the long-term)? (I understand that stock-markets out-perform deposit rates and house-prices in the long-term, but is this true after the charges that funds levy?).

Jayz, lads have we nuffin better to do on a Saturday nite. Anyway I think we are hurtling towards violent agreement.

Short term positions in shares are near to gambling, long term is investing.

Spreadbetting is at least the equal of CFDs for the short term and infinitely superior to direct trading.

Over the longer term direct holdings are probably the most efficient investment.

Yogan asked:

Hi Brendan, where do brokers' fees and fund charges fit in with investing? Do they not constitute a house 'spread'?

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For long term direct investment in shares the stockbrokers' charges and stamp duties should be immaterial. They do make short term trading unprofitable.

Funds' charges have come down a lot in recent years. At the current levels available - e.g. 1% with no entry or exit charges, they are ok. But if you pay big charges, you can turn investing into gambling.

Brendan

Didn't get that Delta course yet.

Back to main theme of the topic.

My definition of gambling is if the range of outcomes is disproportionate to the average of the outcomes.

If that average is negative, then by definition we have disproportion and so, and I think we all agree here, a negative sum game is gambling.

But so too can a positive sum game be gambling.

Would you gamble all you possess on the toss of a coin for double your money plus a euro thrown in, win or lose. Positive sum game but clearly an enormous gamble.

Dermot Desmond presumably regarded his stake in ISTC as an investment. If you or I had mortgaged the house for a piece of that action that would be gambling in my book.

Now, IMHO short term trading is gambling, no matter how low the costs or what the vehicle. The way I see it is that on average you might expect an investment in an Irish share to return 1% to 2% in a quarter in excess of the deposit rate but it seems the actual outturn could be wildly different from this average, anything from 20% down to 20% up.

Hi Harchibald

That is a useful qualification of the definition of gambling.

In my original post, I had considered defining "speculation" as well as investing and gambling. In rough terms speculation would be a very risky investment proposition. A potentially very profitable venture capital start up with a high chance of failure would be speculative for an individual. A portfolio of such speculations would constitute an investment.

Highly leveraged investment could be termed speculative.

ISTC is a good example only in retrospect. The Credit Unions invested heavily in these products thinking that they were low risk.

Brendan

I think we can all agree that this topic if very useful and informative.

Thank you all for your input.

IMO there is absolutely no difference between gambling and investing.

Both you have weigh up the probability of making money from your decisions

I do make a distinction between a "good gamble" and a "bad gamble" nothing more.
I worked for a very succesful investment company as a trader and the first thing they thought us was how to gamble.

They went to great lengths to make sure that everyone understood that they WERE gambling and that their job was to simply weigh up the odds and expected returns.

My own view is that investment and gambling can be regarded as something of a continuum, with considerable overlap and a somewhat irregular dividing line.

Some areas that are generally thought of as gambling can be investment for some people. For example, a professional poker player who is competing against an amateur probably considers himself an investor (of sorts), while the amatuer in that situation is definitely gambling (and may even win).

Spread betting on share prices combines many of the characterstics of both investment and gambling. On the one hand, there is considerable scope for short term variation in share prices, which introduces an element of randomness similar to that occuring in games of chance. On the other hand, there is scope for the exercise of judgement in deciding whether to buy or sell a share which makes the exercise not completely random.

However, it could be argued that the main factor influencing share price movements in the short term is sentiment and that figuring out in what direction sentiment is moving is akin to 'reading' a player when playing poker. So that points you back towards arguing that spread betting is not all that dissimilar to playing poker (which everyone would agree is gambling - or would they?).

I quite like the idea of defining investment as a game where the overall expectation of all players is positive and gambling as one where the expectation is zero sum or negative, but I'm not sure that this issue can be resolved as neatly as that.

I think this is a very intersting topic and one that is worthy of debate. I have my own views on spread betting and where it falls in the continuum, but I would prefer to hear what other people have to say before nailing my colours to the mast.

Regards
Homer

I found the following definitions (among many others) on the internet.

Investing

The act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.

Gambling

Behavior involving the risk of money or valuables on the outcome of a game, contest, or other event in which the outcome of that activity is partially or totally dependent upon chance or on one's ability to do something.

Homer

Homer said:

I found the following definitions (among many others) on the internet.

Investing

The act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.

Gambling

Behavior involving the risk of money or valuables on the outcome of a game, contest, or other event in which the outcome of that activity is partially or totally dependent upon chance or on one's ability to do something.

Homer

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I still see absolutely no difference since any "investment" involves an element of "chance".

Hi Homer

I tend to see things in black & white, so the continuum is interesting.

In a sense, the definitions don't really matter. What matters to me is whether I can expect to make money or not.

I have a portfolio of shares as the core of my pension and personal savings. That is investing. There will be a stream of dividends.

If I go mad, and start betting big on the horses, then that is clearly gambling.


I have played poker in a school where I had a clear edge. I did not consider myself to be gambling. I didn't play when drunk. I quit on a particular evening if I felt I was not playing well. I lost some nights, but my wins were steady overall. It was more like work than investing or gambling.

That school broke up and some years later I joined a school where I was completely out of my league. I realized it quickly and pulled out. I sort of viewed that as investing. I risked and lost some money to see what the school was like.

At the end of the day what matters is "Can you make money or not?". You can call it "gambling", "investment" or "speculation" or even "work". So the question should not be "Is spreadbetting gambling?" - It should be "Can you expect to make money on spreadbetting?".

Boss, fair question, but do you accept that FSB is the same as CFDs is the same as short term trading, except for costs?

Is carpetbagging investing or gambling? Joke Boss.

do you accept that FSB is the same as CFDs is the same as short term trading, except for costs?

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Harchi

I don't know. I have not had the time to study the details of your argument and I hoped that you and Zoran might sort it out to save me the hassle.

You can expect to lose on short term trading after costs.

I don't think you expect to lose on CFDs, but they are highly risky.

I will have to study FSB at some later stage if you and Zoran don't reach agreement.

Brendan

Brendan said:

Harchi

I will have to study FSB at some later stage if you and Zoran don't reach agreement.

Brendan

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Z, the Boss has placed great responsibility on our shoulders. Let us rise to the occasion.

Let's take it in easy steps - please no mega responses, "yes" or "no" most preferred.

Do you agree that FSB on a future equity price is economically identical to a Futures position is identical to a CFD is identical to a geared trade, the only differentiating feature beings costs/taxes?

If the answer is "yes", then we can move on to the next stage: "which is most cost/tax efficient and over which time frame?"