In last week’s article, we looked at some of the differences between gambling and investing, starting off with the challenge of defining the two activities.
Somehow, we managed to find a nice thread along which we were able to build good arguments in support of the notion that even though there could be connections, investing was never the same as gambling.
Okay. This week, we are going to carry the argument further by looking at a few other distinguishing features between the two, and also look at the questions of whether gambling is morally wrong and how strictly it should be regulated, much in the same way that some investment activities are strictly regulated but in this case not based on morality but on protecting public interest.
Indeed, my research on this topic brought out several interesting ironies and paradoxes. For instance, available literature pointed out how most governments generally frown on gambling, unless, of course, they’re getting the lion’s share of the profits, such as with state lotteries, and how many religions frown on gambling but some don’t seem to mind church bingo.
Here, however, lies the truth: not all types of investing are productive and, therefore, there is a bit of gambling with the investment activities that we undertake. Does it surprise you? I hope not.
So let us now consider the views of others who are also knowledgeable on the subject.
Commenting on how financial activities are organised on one of the world’s leading financial markets, revered investor/entrepreneur, Warren Buffett, had this to say:
“Wall Street likes to characterise the proliferation of frenzied financial games as a sophisticated, pro-social activity, facilitating the fine-tuning of a complex economy. But the truth is otherwise: short-term transactions frequently act as an invisible foot, kicking society in the shins.”
But the general view among financial market operators and observers is that in investing, the odds are in your favour but in gambling, the odds are against you.
Ah, but then again, l have a problem here too. “There are plenty of investments where the odds are against you: futures, options, and commodities trading (where you get hurt on commissions and the bid/ask spread), frequent stock trading (for the same reason), and selling short (since the market goes up rather than down in the long run), to name just a few examples. Similarly, while for most types of gambling the odds are against you, it is possible for the odds to be in your favour”, one analyst wrote.
So in effect, an investment is simply a gamble in which you’ve managed to tilt the odds in your favour!
Here are some more insights on the subject from other experts:
“Compulsive gambling has been correctly identified as a problem, and organisations such as Gamblers Anonymous [US] are helping people cope with the problem”, says one expert on the subject.
“No similar problem is generally thought to exist in investing. There is no Investors Anonymous, and no one talks about compulsive investors. But while there isn’t yet widespread acknowledgement of investing addiction, there will be soon [however]”.
In fact, Marvin Steinberg, the Executive Director of the Connecticut Council on Compulsive Gambling (US), stated recently that:
“We don’t know the true extent of the problem [investing addiction] because hardly anyone identifies it as a gambling problem — they see it as a ‘financial problem’ or an ‘investing problem’.”
“Gambling is entertainment, investing is business”
Commenting on financial market performance, Brad Hill, an expert, had this to say:
“Global financial markets represent the greatest spectator sport humanity has ever devised. It has planetary reach, a multitude of local
competitive arenas, volumes of statistics, star players, and — best of all — anyone can move between the domains of observer and participant, fan and player.
If you squint just right, the steadfast newscasters of CNBC appear to be play-by-play announcers, calling the game for US fans. And do financial sections of newspapers differ from sports sections in their presentation of story, data, and personality? Not essentially.”
This statement means that while the ‘gambling as entertainment, investing as business’ dichotomy may have been clear in the past, the line is being blurred.
That stated, however, it must also be stressed that in most cases, you will be able to find whether an activity could be deemed purely as gambling or purely as investing; gambling is strictly regulated and not ubiquitous, and that the odds are usually better in investing than in gambling.
“Investing is saving for specific goals, such as retirement, while gambling isn’t.”
“Many people regard investing as a planned strategy of wealth-building for specific future goals”, says another expert on the subject.
“And this is certainly true of some types of investing. But this is largely a by-product of having the odds in one’s favour. If you have the edge (whether in blackjack or in equities), time and the laws of probability are a powerful combination”.
And lastly, “Investors are risk-averse, while gamblers are risk-seeker”.
According to financial market watchers, risk-taking is intrinsic to both gambling and investing. However, there are a few investments which don’t entail risk, such as fixed annuities and government bonds held to maturity even though not entirely because they do still have inflation risk.
The major difference between the two groups seems to be the participant’s relative willingness to accept risk. Investors tend to avoid risk unless adequately compensated for taking it, but gamblers don’t, they are just interested in the big win without taking any calculated approach.
So if you have read both last week and this week’s articles, make up your mind and let me hear from you.