When is gambling the same as investing?

by ^Kripptic

It’s often said that all investing is a form of gambling and there is a lot of truth in this. But there are also crucial differences.

If you invest in shares in a large multinational company, for example, which provides essential products like food, water, electricity, gas or mines natural resources etc., profitably, then are you really gambling? In days gone by, shares were primarily bought for their dividend income and any capital gain was seen almost as a bonus.

But today – many people seem to see them as tantamount to casino chips to be gambled with. But if you’re a sensible investor – in the true sense of that word – and you can see a well-run and profitable company supplying something that people really need, and your focus is mainly on the dividend stream – then that really is investing rather than gambling. This is because the overall pot is growing. It’s not a finite game; what is often referred to as a ‘zero sum’ game (as it would be with a group of people sitting round a table playing cards, for example) because the pot is growing.

On the other hand, if you’re dealing in currencies, for example, then that is pretty close to gambling.

You “think” the Australian Dollar is going to strengthen against the US Dollar or the British Pound for XYZ reason, so you buy Aussie Dollars – or short the other currencies against the Aussie Dollar. But this is, essentially, a “bet”. There’s no dividend income and there’s no enlargement of the overall “pot”; another zero sum game (ignoring any interest you may receive in your bought currency of course). You simply get it right, or you get it wrong.

So this is closer to gambling and we aren’t all as smart as George Soros! But at least you are using your judgement which, over time, may be like George Soros’s judgement in the sense that you get more calls right than you do wrong – or it may prove otherwise; only time will tell if you have what it takes.

This is rather like a person who studies the form to make value-based bets on the horses. S/he either comes out ahead or not. But at least it’s value-based. The same is true of poker.

Such gambling is not like gambling on games of pure chance – which is what generally happens in a casino, with games such as roulette, for example. In such games the house edge is against the gambler and there is no real judgement required.

In these circumstances, the statistics run slightly against you. But at the same time, you can often profit from the free money you can sometimes get as welcome bonus from 32Red and others. For instance, at the moment 32Red is offering a $10 no deposit bonus which makes it an attractive incentive. Or, perhaps, you simply love playing the games for their own sake. There’s nothing wrong with enjoying the process – but it’s not investing.