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Is Investing Gambling?

>> Friday, October 23, 2009

Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods.

Investment is holding an asset in a hope for some recurring or capital gains.

We may not realize it, but breaking down to the fundamental level, the definition of these two words are surprisingly similar.

Basically, they both involve money and chance. If what you hope for happens, you win. If it does not, you lose. For a game of "big / small", you place a bet of big or small and hope the result is in your favor. Similar in the world of investment, there is only 2 outcomes, you make money or you lose money.

So what makes investment different from gambling?

A. The time frame.

In most games at the casino, you will more or less know the results rather instantaneously. Or other types like the lottery, you will know the results at a predetermined time within a fairly short time frame.

Whereas for most investment, you may not know the results until years later and at no predetermined time. Warren Buffet is known to hold his investments for an average of 17 years! Did anyone know immediately that Macdonalds or Coca-Cola would be where they are today when they first started?

Those who treat their investments like placing a bet for an overnight wonder would be viewing investments no different from gambling.

To reduce the risk of timing, the approach of dollar cost averaging can be used.

B. The odds.

For most gambling games, the odds are predetermined. A dice has 1/6 chance; the 4D lottery has a one in 10,000 chance of any one number and the list goes on. The payout matches the odds, after deducting the cut that the gambling house gets for each bet (that is why the house ALWAYS wins). It is a zero sum game.

However, investment can appreciate in value due to the performance of the underlying asset. If everyone buys a certain stock without selling, as the company does well, it will pay out handsome dividends without any change in the original price everyone paid. Everyone wins!

Investments carry risk, not all the assets invested into will do well. The company like any business might not perform, the property invested might depreciate in value and so on.

To reduce this risk is to diversify so that hopefully not all the bets under perform.

Is investing gambling?

It all boils down to the mindset one takes towards investing. If one has the mindset that investing is a easy get rich quick scheme, then investing is gambling, or the more technical word used to describe it is speculating.

Conversely, if one adopts the mentality that investing requires proper analysis of the underlying assets and it is meant to progressively grow over time, then investing is not gambling but a business venture.

3 comments:

la papillion October 24, 2009 at 8:53 PM  

Hi :)

Sometimes i wonder why pple will debate at length on what is gambling and what is investing. Actually, the name is not impt, it's the attitude towards it that matters. There are professional gamblers who treat their play very seriously and business-like, so well as those who are seeking entertainment.

In that aspect, I very much agree with you that the mindset is impt. You can call whatever you like to it - speculation/gambling/trading/investing :)

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