TLDR? Gambling and investing are similar on the surface, but they are differentiated by key differences in how risk and probabilities of scenarios play out. Gambling returns a net zero, whereas investing can lead to sustainable gains over time.

One difference is that investing promotes production and manufacturing and beneficial products for Ummah and creates useful job which results in many benefits for having a healthy society. But gambling has no beneficial product. Without investing many of factories and industries will never start working. What’s the difference between investing and gambling? Tim Price looks at the difference between investment and speculation – and where value investing comes into the picture. Gambling and investment have a lot of similarities and you can find a quite difference between both of them. Investment is something you give your money or you place your money on something which you are planning to buy them.

Hey guys, welcome back to another week here on My Money What. Today, we are going to talk about a topic that we’ve heard thrown around lot:

1. Many investors feel that stock market investing is just like gambling. However, there are major differences between gambling & investing. Read this article to know more!
2. The reality, though, is that there is a difference between investing and gambling – and speculation is something else altogether. Rather than assuming that an investment in the stock market.

Side note. (When I was thinking about the concept behind this post, several ways of tackling it did occur to me. I could go down the typical route and talk about how a person needs to understand the investments they are buying. Or some variation of this idea. This has been repeated ad nauseum, and I am taking a different approach. Hope you enjoy it.)

No matter who you are, if you live in a capitalistic society, you have come across this, “Investing is Gambling”. For me, I’ve heard this meme countless times in my life, and these instances are forever seared into my memory.

I feel a genuine ire when these misconceptions about investing are thrown in my face like they are a representative of the nature of the world. However, it also sparked a genuine curiosity in me. “Why is it that so many have such similar ideas about investing?” I wondered.

And so, I spent some time pondering and reflecting about the abovementioned examples of how others view investing. Clearly, there is a lot of cultural angst (fear) that we as a society carry towards it.

After giving it some thought, I arrived at a conclusion. I think that for every individual who has been turned off by investing, there is a history of “trauma”. A history of deep personal loss that leads to strong feelings of aversion. The thing about trauma is that, the event of deep loss could have happened to anyone. It could have happened to you, a family member, or even someone close to you. Either way, you experienced/saw how someone “invested” and was instead led down the path of financial ruin.

Off the top of my head, here are some of the examples of financial loss that I others told me about:

• How some families have been ruined over how a head of household “invested” (really, speculated and gambled) in the stock markets
• The recurrent horror stories about how people lost their life savings in Great Crises that happen time and again
  • The Great Depression
  • The Asian Financial Crisis
  • The Dotcom Bubble
  • The Great Recession
  • And on and on and on

I get it. When someone is traumatised by a negative event, they seek to avoid making the mistake that brought them there. You see, the thing about financial stress is that the bleeding never stops with just money woes alone. Money woes are often the beginning of all sorts of unhappy things:

• Divorce (money woes are the number two reason for divorce)
• Families breaking up
• Kids growing up with a chronic sense of scarcity; etc.

All sorts of happy things stem from money-related woes. And so, these people may develop a genuine aversion and fear towards investing. They then build up memeplexes (mutually reinforcing ideas) that “protect” them against the potential of financial ruin. These memeplexes include ideas like:

• “The market is fixed and controlled by the large banks, institution and politicians who only use it to enrich themselves. Small fish (individual investors) best not get involved and get eaten by sharks.”
• “Look at how the market is a mechanism for fraudulent activity.”
  • This is usually said in response to incidents of financial fraud being unveiled.
  • Incidentally, some seem to have this weird conception that the rich only got rich because they participated in some “dirty business”, whatever that means.
• “It’s not good to gamble.” (The thesis of this post.)
• “How much you earn and lose in the market is controlled by a completely random process.”
  • I suspect this is based off of a very superficial understanding of the random walk theory. (We will discuss random walk in another post).
• “Putting too much money in the market is equivalent to taking on too much risks. We should be putting money into fixed deposits or leave it in our bank accounts instead.”
  • This most recent response was what prompted me to write this article.

What’s unfortunate about these memeplexes is that over time they become deeply entrenched in the minds of some. Because of this fear and entrenched mindset, they prevent people from developing an understanding about how investing and capitalism works.

Your Responsibility to Learn

To me, the solution is simple (although not necessarily easy). A person has to work towards developing an understanding of investing and capitalism if they would like to thrive money-wise. (Stick with us, and we will bring you through all the way eventually).

Keeping money locked away in a vault of guarantees is akin to trying to protect your children the negative things in life. (If you don’t have kids, just imagine for a second that you do). Not only will they not develop to their full potential, rather, they become diminished because of it (due to inflation).

Your money, like your children, need to grow. Just like our children, there is no other hand that can guide it but yours. No one is more interested in your future wealth and the future of your kids more than you are. What you hold in your hand, therefore, is a responsibility towards your own future. What better to guide your money through the unpredictable ocean of life, than the hands of a seasoned, knowledgeable sailor?

Rise up, take the wheel, as fearful as you may be, and learn to steer. You got this. To help you along, let us begin by understanding the similarities and differences between investing and gambling. So that we can identify the instances where we are gambling, and the instances when we are not.

Investing vs Gambling?

To tease apart the two, let’s begin by understanding how the activities of gambling and investing are superficially similar. As we go along, we will also discuss how the two activities are different, and how they don’t lead to similar outcomes.

Investing and gambling are both activities whereby:

• There is a sense of anticipation and excitement that arises out of participation in either activity

1. For Investing and Gambling, there is an Inherent Uncertainty about the Outcome

In participating in investing and gambling, one has to accept that there are no guarantees.

Let’s take a look at gambling first. Suppose you were playing a game of dice. Every time you roll the dice, you are equally likely to access one out of 36 outcomes. (The more complex the game, the larger the number of outcomes). Regardless of the type of preferred gambling method, however, the outcomes are by and large equally-weighted and random in gambling. (Some would argue that other forms of gambling, like blackjack, allows you more control over the game. That’s true. IF you actually get good at tricks like card-counting. And, IF casinos did not actively ban and blacklist card counters.)

Conversely, when we talk about investing, , there is potentially an infinite number of scenarios that may play out. This is because there are many moving parts in a company (or a financial product). An employee might not follow company guidelines; there might be fraud; management might not decide to stay; the company may be outcompeted; the sector may become uncompetitive; and on and on. There is always going to be some scenario that might occur for which you are wholly unprepared for. Because of this inherent uncertainty, you are never guaranteed to make money as an investor.

To those with a preconceived fear/ignorance/prejudice against investing, I know that I am not helping with your anxiety. But! (And there is a huge ‘but’). The main difference between investing and gambling is that in investing, the odds outcomes occurring is not equally-weighted. Depending on factors that an investor can discover with his or her investigative or due diligence process, the investor can weight outcome probabilities ahead of time; conduct their discounting process (aka incorporation of risks into their investing model); and decide if they would like to enter the deal or not. Such a level of control and understanding is usually absent in gambling.

Which brings me to similarity number two.

2. In Investing And Gambling, You Risk Some Money Hoping To Gain More

Gambling and investing are activities which involve putting some money at risk with the hope/expectation to gain more. The difference between the two is that in gambling, or equal-weighted/random scenarios, you are hoping to gain more. On the other hand, in the case of investing, a competent investor always expects to gain more.

There is a crucial distinction here. In equal-weighted/random scenarios, such as gambling, the long-term gains from continual participation is a big fat net zero. (When you incorporate the fact that the odds of winning at casino games are heavily skewed in the casino’s favour, this works out to a net loss for the participant, and a net gain for the casino.)

Conversely, in investing, because of the process of investigative work, the size of the potential gain scales with:

• Probability of favourable scenarios versus probability of unfavourable scenarios
• Size of the opportunity
• Position size that the investor takes

The idea here is to minimise the downside, while trying to access the upside. This allows the investor to achieve a net targeted rate of return. (Interested readers can see this principle at play as discussed in the previous article on bonds).

However, even if you don’t do that, you can access a long-term rate of return just simply by investing in low-cost index funds. Index funds are a pretty neat investing vehicle which requires much less work, while returning you a nice rate of return over time (as discussed in our article here).

3. There are Factors Outside of Your Control

I feel this point of there being factors out of one’s control is related to point one. The factors being outside of our control in gambling also relate to the equal-weightage or random nature of gambling. For investing, on the other hand, the factors that are outside your control can be mitigated. One simple way to do this is to diversify. By diversification, you can access alternative companies, sectors, and even countries.

In investing, diversification really is a magic pill that protects you from unsystematic risks associated with any investing position. (However, do remember that too much diversification may lead to mirroring the market at a much higher cost than you need to. There is such a thing as too much diversity.)

“Diversification is a protection against ignorance.”

There are two ways to see this quote – (A) That diversification is for those who don’t know much about what they are doing in a negative sense. Which means that one should improve their knowledge about investing. Or; (B) In a positive sense, those who don’t know much can seek shelter in broad market returns.

4. There is a Sense of Perceived Anticipation and Excitement that Arises out of Participation

Because of the two activities involve some possibility of making money, there is often an air of excitement associated with them. (Who doesn’t like to make money? If you ever find yourself in such an unhappy position where you abhor the idea of making money, please drop me an email at [email protected]. My Money What, here for all your cash disposal needs.)

In gambling, the excitement arises out of the rush of not knowing whether the next hand or the next play is going to be the lucky one that finally pulls in the pot. And so, when gambling, you’re glued to the edge of your seat, always anticipating the next hand.

On the other hand, when investing, the excitement that arises is due to finding a hidden gem within the market. Although there is always that excitement when you turn over a hidden gem, good investing can be incredibly boring. In fact, there is an old adage:

“If you want excitement, take $800 and go to Las Vegas.”

“Good investing,” it is said, “is like watching paint dry”.

Why this is the case is because, as much as possible, the investor removes luck from the equation. There is a calculated risk that the investor makes. Depending on the type of investment you make, your certainty about when the investment will deliver its promised value varies.

However, it is important to note that different investments provide you with different levels of certainty. Bonds and real estate fall into the category of being investments with a higher certainty of returns. This characteristic is inherent to the two investment vehicles since there is an immediately calculable rate of return.

Stocks on the other hand, can take some time to realise their value and deliver promised returns. Let’s take deep-value stocks for example. On average, deep value stocks take roughly 3 years to unlock their value. (We will discuss unlocking of value in a future article).

Honourable Mention: Speculation

Of course, there can still be some confusion as to what constitutes an investment, and what doesn’t. As alluded to the above, an investment has some qualifying criteria that I will restate here:

• There is an expectation, not hope, of profiting when you invest
• You can understand/discover probable outcomes with clarity ahead of time when investing
• An investor can account for different outcomes either through the investing model or diversification
• Homework and due diligence are the keys to successful investing

For beginning investors, please don’t make the mistake of speculating in the markets as investing. Speculation is throwing money in the markets without a clear idea of what you are doing. To be fair, the difference between speculation and investing is something that we understand when we gain some experience. However, to save you a lot of potential pain, I would like to highlight some examples of speculation to avoid. Beginners often commit these errors, including myself when I first started.

Some of examples of speculation are:

• Trying to buy low and sell high.
  • No, stocks are not guaranteed to return to their previous price point. You can beg or even pray, it wouldn’t change a thing.
• Picking a company at random, hoping it all works out.
  • Good luck with that. I hope it works out for you.
• Relying on a “guru” to tell you what to buy.
  • AKA being the sucker in a pump-and-dump scheme (something we will address another time).
• Chasing the latest hot stock tip and throwing your life savings in.
  • Oh, sweet innocent child. By the time a stock tip has gotten to you, the stock is likely in overpriced territory.

Make no mistake. If you do any of this, to me, you are not investing, you are speculating, and you are indeed gambling.

In summary, many have had a history of trauma with regard to investing. But, the faster we accept that and move on, the faster we move towards understanding the activity of investing. Learn everything you can about investing. Read articles that tell you the difference between investing and gambling (beyond this current one).

Ultimately, investing is both an art and a science. I often tell others, “Where the quantitative and qualitative factors meet, there you’ll find your story. A seasoned investor is someone who extracts and synthesizes the key aspects of each source of information. Doing so, he/she mitigates and controls risks. (Something that a gambler will never have access to.)

Finally, guard against speculation, for these have an insidious effect of looking like investments, even though they are not.

I hope this article helped, and I wish you a happy investing journey.

See you next week.

Mr S.

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American Auto Brokerage has been serving Connecticut insurance consumers for 25 years. Our customers’ satisfaction is our #1 priority. Over the years this philosophy has enabled us to develop strong relationships with our customers who return year after year. We welcome you to become a part of the American Auto Brokerage family. In this short article, we hope to show just what insurance is, but also what makes it different from some other monetary schemes that are popular!

The Basics of Insurance – Where, How and Why

Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of an uncertain loss. An entity which provides insurance is known as an insurer, or insurance company. A person or entity who buys insurance is known as an insured.

Over time, many kinds and forms of insurance have evolved. The property, health and vehicle insurance are the most commong kinds, and it is easy to see why. All three things are extremely valuable, and we’d go at great lengths to protect their integrity. A damaged vehicle or home is a considerable strain upon one’s assets, and insurance is used as a way to reduce overall life stress by securing them.

The Biggest Question of All

Of course, it won't take long until the people ask the most important question of all, and that is: What is the difference between insurance and gambling? Why is insurance usually allowed whereas some countries take very strict meausres against any sort of gambling endeavour?

Legally and culturally, there is a clear distinction between gambling and insurance. Economically the difference is less visible. Both gambler and insurer agree that money will change hands depending on what transpires in some unknowable future.

Difference Between Investment Speculation And Gambling Chart

At surface level, insurance really looks like gambling. Two parties agree on the consideration (by calling that wager a premium instead), the type of chance (by using expectations of when the insured might die, for example), and a prize (by referring to the winnings as a death benefit). It's a consolation prize for the beneficiaries but a prize nonetheless.

The risk of losing money gambling to me seems less relevant than the risk of getting addicted to gambling and making irrational decisions. No one believes there's a problem with car addicts that the government needs to solve. There is, however, a real problem of gambling addicts, not too different from heroin addicts.

You can’t win with insurance; “break even” is the best you’ll get. On the other hand, your financial losses are limited with insurance. From a statistical perspective, gambling and writing an insurance policy are the same where we give a price to an odd. The main difference lies in their different purposes.

The purpose of insurance is to restore the insured to his original position, not to afford the injured person the possibility of making a profit. There might be gain in gambling. In insurance there is no possibility of gain.

However, that does not mean that there weren’t (unsuccesful) attempts to merge both gambling and insurance. Two inventors received a patent for a method and apparatus by which a gambler can protect against excessive losses. The invention involved setting up a machine inside the casino where gamblers could choose the amount of coverage needed. There is no record of this invention being installed or put into use at any casino.

Gambling insurance is quite unusual in practice because it may encourage a policyholder to place bets recklessly, compounding losses. As with all insurance, one must pay a premium to receive the coverage.

Difference Between Investment Speculation And Gambling In Tabular Form

As we can see from the explanations above, there are different ways to approach gambling. However, it not being allowed in certain countries is not a reason not to visit and play real money casinos; thanks to the magic of modern technology, all of them are just a click away!