Are you an investor or a gambler? I believe nobody likes to be called a gambler but frankly
speaking, very little separates their purported investments from gambling.
Nothing ventured, nothing gain. People invest or gamble with one ulterior motive, that is to make money, but to do that, you have to risk your principal first. There is an enticing Wall Street myth that the only way to reasonably make money and beat inflation is through the stock market. To be sure, opportunities for sky-high profits abound but similarly, stocks can nosedive into the dumps, due to extraneous circumstances. Think of the tech bubble in the late 90s, Black Monday in 1987, and inflation fears of the 1970s.
Let us first look at what constitutes gambling. Whether you are at the casinos or the tracks,
gambling/betting involves purely games of chance. Tossing a dice doesn't require skills and the outcome is based solely on luck. Of course, when you rig the system or have an excellent memory in computing statistics, the odds will shift in your favor.
Professional gamblers make a killing as they are up against other competitors while the house
takes its cut regardless of how the money is distributed among the players. My advice (if you want to keep your shirt), is to get up from the table when you look around and cannot find a fool... that guy is probably you.
1. Gambling As An Entertainment
We tend to look on kindly at our losses from gambling because we treat it as an entertainment or a means of socializing. Besides all the fun and relaxation, we also have different expectations of gambling. With a strike-it-rich mentality, gamblers have no qualms about losing hundreds of dollars to chase the million-dollar jackpot. However, we get all serious and worked up when it comes to losses in investments.
Investing is certainly much slower, doubling your money takes months or years. The money we invested in companies provide an impetus to their expansion plans while we sit back and reap the fruits of their endeavors. When the company reports increasing sales and profits, investors benefit from a return of cash in the form of dividends or a ballooning stock price.
Sadly, due to the accessibility of online trading today, stock market have become a new venue of entertainment and money-making source for gamblers who do not even a basic understanding of what the companies are doing. Brokerages and financial web sites are only too happy to capitalize on such a trend.
2. Investments Can Spur Economy
Investments for productive uses by a company can spur an economy and create employment. To a
large extent, businesses depend on venture capitals and angel investors, besides the conventional banking institutions, for liquidity and efficiency.
Gambling, on the other hand, does not contribute positively to the economy except providing revenue to casino owners and the government in the form of taxes. However, it is unfair to say all investments are productive. For example, the frequent buying and selling of stocks by day traders result in volatility and have no clear benefit on the business or the economy.
3. Investments Are Less Risky
It is true that some investments have virtually zero risk (disregarding inflation), like fixed deposits and Treasury bonds. But the same cannot be said of investment products like futures, options, commodities trading where the odds are stacked heavily against you. The game is heavily leveraged and any adverse movement by a few points can wipe out all your hard-earned money.
Gambling can be less risky, especially for professional gamblers. They behave like investors, observing the situation while waiting patiently on the sidelines, entering the fray only when the odds are in their favor. They can figure out the odds rather accurately depending on the events which have occurred but on Wall Street, choosing a winning investment is a big challenge, even for the super-computers.
4. Investments Are Less Addictive
Gambling is deemed as an addictive vice, is considered morally wrong by religions and strictly regulated by governments. Indeed, compulsive gambling has resulted in many broken families but investment addicts are not so well-documented.
There are investors who monitor the stock market hourly and trade aggressively, incurring huge commissions and betting more money than they can afford to lose. Some have turned to suicide when the stock market crashes and they lose everything overnight.
The psychology behind compulsive gambling and day traders is almost identical. It is the thrill-seeking rush they are after, rather than making money. They are addicted to the volatile actions and reveled in the knowledge that their decisions are right.
5. Investing Is Based On Skill And Research.
Anybody can gamble based on luck while investing is not for the laymen as it involves skill and research. However, many investors don't do research at all. They act on tips from newspapers or brokers and frivolous rumors from the coffee shop. Many people buy stocks on impulse, driven by greed, when they see a stock increasing, even if it is grossly overvalued.
Professional gamblers will put these investors to shame with their rigorous research. Some sport bettors pay for real time data, read newspapers, and spend hours checking the odds on related websites to conduct arbitrage. They keep their emotions in check and have a disciplined system to betting. You will not find them placing bets daily but only on risk-free and profitable opportunities.
To conclude, the main issue in understanding the difference between investing and gambling is not what you do but how you do it. There's a big difference between buying a stock after exhaustive research and buying it blindly. If you treat your endeavors seriously, remain logical, avoid addiction, and conduct proper research, you are an investor. Else, professional gamblers fare much better in all respects.