Personal Finance

Is investing like gambling?

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  • Apr 1st, 2012 5:27 pm
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Sr. Member
Mar 9, 2008
740 posts
86 upvotes
Winnipeg

Is investing like gambling?

Well..? Is it? With investing in stocks for example, you never know whether the company will perform poorly or superb. The same can be said about playing your odds at a slot machine.

Many people invest large sums of their money into stocks, mutual funds etc. What's the difference between this and gambling?
27 replies
Deal Addict
Jul 8, 2009
2028 posts
482 upvotes
Edmonton
I don't think so, at least not the way I do it. Buy good companies and hold them for a long time. It's Warren Buffett's method. If you trade stocks a lot, then it's like gambling.
Deal Addict
Jun 13, 2009
1026 posts
277 upvotes
With investments you have the option/ability to take your money back. You might incur a fee or penalty but with gambling, once your quarter is in the slot, all you can do is pull and hope for the best..
Deal Addict
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Jun 28, 2007
3866 posts
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mastercool wrote: Well..? Is it? With investing in stocks for example, you never know whether the company will perform poorly or superb. The same can be said about playing your odds at a slot machine.

Many people invest large sums of their money into stocks, mutual funds etc. What's the difference between this and gambling?

..it depends on what you are investing in - the riskier/less transparent the asset you are investing in the more it is like gambling because you are simply playing odds. Generally investors can mitigate the likelihood that their investment returns will be determined "by chance" by understanding what they are investing in and consequently being able to shift the odds "into their favour". Easier said than done, of course! Meanwhile the technical definition of gambling is really any activity in which money is put at risk for the purpose of making a profit, and which is characterized by: little or no research being conducted; the odds are unfavorable; the behavior is compeltely risk-seeking; an unsystematic approach is being taken; emotions such as greed and fear play a role; the activity is a discrete event or series of discrete events not done as part of a long-term plan; the activity is significantly motivated by entertainment or compulsion; ownership of something tangible is not involved; no net economic effect results.

BTW I think there is also an interesting "grey line" which could be common between investing and gambling and that's "speculating" - which is characterized by taking a high degree of risk for the high potential for a reward.
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User avatar
Feb 15, 2008
26318 posts
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Calgary
Generally we think of casinos and 'gambling' as being entities that have expected payout ratios of <1, ie: for every dollar you put into them, on average, over the entire universe of "gamblers", the average person will walk away with less than 1.

The same would also apply to the "options" or "futures" markets -- the expected payout ratio is "1", ie: wealth is neither created nor destroyed in futures and options, but fees and commissions are subtracted, which make it a 'gamble' because the payout ratio is <1.

Now, with the 'stock market', generally, business ownership produces positive benefits for society, and an actual return on investment on average. Thus the expected payout ratio is >1. So the 'stock market' isn't a gamble like a casino, because, over the long term, and given enough diversification, everyone can make money from it and society can be bettered.

Payout ratios or expected returns are a statistical concept which refers to averages over the entire probability-weighted universe of potential outcomes. Obviously some individuals will invest in individual stocks, or certain specific stocks, and may make a ton of money (ie: Apple), or lose everything (ie: Nortel) because they've weighted their individual outcome to a very specific part of that universe (ie: Apple and Nortel's stock prices). Others will globally diversify into index funds, and obtain exactly the average expected outcome.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
Deal Guru
Feb 9, 2009
12381 posts
11307 upvotes
Gambling in the Market:

1) investing in a very small cap stock your hoping will either a) get bought out b) get big (think Microsoft, Wal Mart, etc in their youth).
2) Future and Options betting on short-term directions of the stock or commodity -- hard to predict and you can lose your entire investment if the bet goes against you.

Investing:

1) Buying good quality companies that pay a dividend. Yes they too can go down during a market downturn but overall their earnings will keep with inflation
2) If you new you can buy mutual funds and/or etf's.
3) Bonds: Through mutual funds as well, though bonds are at historic low yields and once they raise, this will cause bond prices to crash -- but a short-term bond fund will have less volatility and its hard to say when they'll increase rates so its still a good option.
Jr. Member
Mar 2, 2011
190 posts
14 upvotes
Richmond Hill
At the end of the day, it depends on WHY you're putting money into the market. If you're speculating, sure, that is a form of gambling. Buying stocks represents a shar of ownership in that companym something that you never get with "true" gambling.
Newbie
May 20, 2009
33 posts
24 upvotes
It's pure gambling if you're simply guessing or choosing at random.

If you're using a methodical approach using reason and some sort of quantitative analysis, then you're investing.
Jr. Member
Feb 18, 2011
188 posts
5 upvotes
Toronto
In my opinion, if there's a chance that you'll lose money, it's a gamble. It's not the same as spinning a wheel or pulling a one-armed bandit, but there's a risk. We all try to minimize the risk and make good choices but ultimately, there are no guarantees.

Ask someone who invested heavily in RIM one-four years ago if investing is like gambling.
Deal Addict
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Nov 22, 2002
3047 posts
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dagambler wrote: In my opinion, if there's a chance that you'll lose money, it's a gamble. It's not the same as spinning a wheel or pulling a one-armed bandit, but there's a risk. We all try to minimize the risk and make good choices but ultimately, there are no guarantees.

Ask someone who invested heavily in RIM one-four years ago if investing is like gambling.

I don't think this statement is fair. It's like saying investing is gambling because you bought Nortel or Bre-X.
How many investors of these two companies knew anything about the company or their products.
What were their valuations at their height? Pretty crazy.
When you gamble you have little to no control over the "game". The odds are already stacked against you in favour of the house. Whether it's 51% to 49% or some other margin.

When you're purchasing equities, you have some information at your disposal. Not all, but enough to make reasonable decisions. All large public companies must file with the government. Dividends must be paid from cash.

People had a lot of time to get out of RIM. Apple announced the iPhone in Jan 2007.
By October, units were rolling out to the consumer. What did RIM do during that time?
Twiddle their thumbs. They didn't take the threat seriously and ultimately paid the price.
As a consumer in Feb 2008, I bought my first iPhone, and loved it from day one.
The Blackberry, couldn't stand it. I also hated the Windows Mobile products even though everything else I run is Windows.
I'm of the belief that you buy companies whose products you like and said company has reasonable valuation against it's peers in the sector.

That my friend is investing.
Deal Expert
User avatar
Feb 11, 2009
20055 posts
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Toronto
By day trading, you are always trying to predict what happens next, and that is a complete gamble

With long term investments, most of the time if you put your money into something like TD bank you know theres' always growth and a banks not about to go bankrupt (usually!), however stuff like the 08 recession happens where you see banks in the US like Citigroup go from $50 to $1 (dont be fooled by split prices). Or companies like RIM which go from $90 to $13 in a year!
Banned
Feb 17, 2007
3190 posts
203 upvotes
Investing is like gambling.
People have no choice byt to put their money in stocks. so we are forced to gamble.
If i can earn 10% by putting my money in my bank account, i wouldnt touch stocks.

In a sense is that you put your bet on stocks instead of saving account.
The real return with saving accounts out there is negative right now.
Deal Addict
Jul 8, 2009
2028 posts
482 upvotes
Edmonton
ACC-Major wrote: Investing is like gambling.
People have no choice byt to put their money in stocks. so we are forced to gamble.
If i can earn 10% by putting my money in my bank account, i wouldnt touch stocks.

In a sense is that you put your bet on stocks instead of saving account.
The real return with saving accounts out there is negative right now.

If you have enough time, I disagree. How is it gambling to buy shares of a great company, a solid mutual fund or a good ETF and own it for 10 years? But there is risk in everything. I could die on the five-minute drive to work but I go because the reward is worth the small risk. Investing is like that.
Newbie
Mar 7, 2012
39 posts
2 upvotes
HAMILTON
dagambler wrote: In my opinion, if there's a chance that you'll lose money, it's a gamble. It's not the same as spinning a wheel or pulling a one-armed bandit, but there's a risk. We all try to minimize the risk and make good choices but ultimately, there are no guarantees.

Ask someone who invested heavily in RIM one-four years ago if investing is like gambling.
Under that interpretation, is it possible not to gamble? There is a chance that you will lose keeping all your money in the bank...or in cash under the mattress...
Member
Jan 23, 2006
202 posts
80 upvotes
Vancouver
Kifler wrote: It's pure gambling if you're simply guessing or choosing at random.

If you're using a methodical approach using reason and some sort of quantitative analysis, then you're investing.

Actually if you simply choose at random, that's a methodical approach. With enough guesses, you approach the diversity of the index, so you're investing.

If you follow technical analysis or something like that (e.g., you're day trading, not investing), then it's like gambling, but still, the odds are stacked in your favour.
Banned
Feb 17, 2007
3190 posts
203 upvotes
All and all, most companies become more valuable over time.
When you factor that in, the chance of you losing money is smaller than the chance of making money in stocks.

Now, if you put money in banks, you are 100% certain to lose due to negative real interest rate.

Most people doesn't realize this. When you get paid by your employer, you have already invested in something the day you got your pay cheque.
Want to know what that is? It's cash.
By default, you have invested in cash of which will lose value over time with 99.9999999999999999999% confidence level. Well, there might be a time for deflationary, but that doesn't come by for centuries.

Anymore concerns?
Deal Expert
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Aug 18, 2005
21223 posts
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Burlington-Hamilton
mastercool wrote: Well..? Is it? With investing in stocks for example, you never know whether the company will perform poorly or superb. The same can be said about playing your odds at a slot machine.

Many people invest large sums of their money into stocks, mutual funds etc. What's the difference between this and gambling?

The stock market has a decades long record of returning positive gains if you stay in it long enough.

Gambling, on the other hand, is more likely to lose money the longer you stay in it.
- casual gastronomist -
Deal Addict
Dec 11, 2007
1958 posts
582 upvotes
Markham
the difference between gambling and investing just depends on which side of the casino table (or trade) you're on :razz:
Deal Expert
User avatar
Nov 2, 2003
17117 posts
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GTA
Gambling is actually more predictable and thus "safer". You know what the odds are and you can make your decision based on those odds. You can rely on knowing that those odds won't change after you bet.

Playing the market is more unpredictable because information is imperfect. Look at Nortel or Enron.
Deal Expert
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Aug 18, 2005
21223 posts
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Burlington-Hamilton
actng wrote: Gambling is actually more predictable and thus "safer". You know what the odds are and you can make your decision based on those odds. You can rely on knowing that those odds won't change after you bet.

Playing the market is more unpredictable because information is imperfect. Look at Nortel or Enron.

With gambling, knowing the odds means that, if you play for long enough, you are going to lose 100% of the time.

On the other hand, with your comments about Enron or Nortel, you are digging into the difference between investing and speculating. If you are interested in making big money fast, maybe you sould try casinos or the stock market, because it could happen. Working these short-term fluctuations is the act of "Speculating".

The act of "Investing", on the other hand, cares not for things like Enron or Nortel. Investing goes into buying into large segments of the market for long periods of time. It's not like big companies went bankrupt or committed frauds before the debacles or Nortel or Enron. Short term fluctuations have happened in the past and I am sure more bankruptcies and fantstic frauds will happen in the future. But the fact remains, the stock market has a proven history of winning in the long term. And I do emphasize long term here as the term includes investors and excludes speculators.
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