How Isn’t Investing the Same as Gambling?

I like to bet on sports, mainly hockey and NFL football, which I also enjoy watching. Before I make a bet (my normal bet being somewhere between $2-$5), I do some basic research on the money I’m about to wager. I look at the piles of information available (for non sports fans, you would be amazed at the tomes of information compiled in support of a 60-minute game) and make my pick, laying money down and hoping that the hypothesis I had about the game was correct.

This past Sunday, I felt that the Indianapolis Colts would win at a margin higher than the posted “line” of 3.5 points. I played for higher odds and bet they would win by 7 points. If you were to look at the score of the game they played in, you would see that I was completely wrong with my bet (not only didn’t they win by 7, they lost by 17). A loss betting is not good, as you lose 100% of the wagered amount, which is the reason why I keep my bets small enough to make watching the game interesting to me, while minimizing the impact of the losses on my available betting money.

For me, Investing works the same – prior to investing – whether it’s in a house, individual stocks or bonds, or Exchange Traded Funds, I research thoroughly (there is actually less information on a lot of investments than there is on sports games). I filter through all of the information and make my investment decision based on what I’ve read. As I invest, similar to when I bet on a football game, I have a story of why I’m making the particular investment I’m making, as well as an expected outcome of the money I have laid down.

To me, the main difference between sports betting and investing is the amount of faith I put into the information available. While there have been cases of falsified information, management and the auditors hired by corporations have much more to lose when they make reports on companies than some guy who makes a living selling pageviews on a sports website. Another difference is the “soft” decline offered by stock investment, compared to a binary win or lose outcome of a football game. Any company I’m investing in at least has assets that can be sold off which I have a chance at receiving some money for if the company fails.

Both sports betting and investing depend on third parties acting out the hypothesis you have in place for them – whether it’s a projected 7 point win for the Indianapolis Colts, or by maintaining the current market share and profitability in the long-term for a company I’m investing in. I’m sure other people may see it differently, but I see both of these activities as somewhat risky, just in different ways. It’s for this reason I’m much more willing to sink thousands of dollars in the stock market and a very tiny fraction of this amount into sports betting.

When you “pull the trigger” on an investment, how do you convince yourself you’ve made the right decision out of the thousands of things you could invest in?

7 thoughts on “How Isn’t Investing the Same as Gambling?”

  1. Stock market investing is more like paramutual betting (horses, dogs) than any other form of gambling. The more orders (bets) for a particular stock (horse), the share price provides less value (lower odds).

    If you’re going to “play” the market, then you want to pick a stock that is value-priced, where the odds are higher.

    From an investing point of view, you can modify what you consider to be good value by the dividends you receive while owning the stock. Much like you would evaluate a rental property.

  2. If I can think of one activity that you should avoid if one wants to retire early, it would be gambling. Golf would be next.

    Good luck Dave.

  3. There is always a risk when you invest. You just hope that the rewards at the end of the day will be worth the risks you’re taking.

    Sounds like you found a pretty entertaining way to spend a weekend researching then watching your games. $2-5 for entertainment’s not bad at all!

  4. Don’t try to convince yourself you’re right. It’s easier to admit you were wrong and cut a loss while it’s still small enough to not cause much damage.
    Also there’s a reason for the term “margin of safety”.

  5. Perhaps the biggest difference between gambling and (market) investing is that in the aggregate, gamblers lose and investors win (i.e., the house wins more often in gambling, while the market goes up over time).

  6. @ George – I see your analogy – it is sort of the inverse of horse racing, as long as you have better information (or at least different information) than the public. Most people’s information is pretty limited though, and probably less useful than can be had by experienced horse betters.

    @ Jon_Snow – I think in the past 3 years, I’ve probably deposited no more than $50 into a gambling account. With tiny bets on sports that I understand and enjoy, I can get quite a bit of entertainment. The entertainment value to me for these small amounts of betting (which I am not terrible at, but not good enough to increase my wagering by any degree) seems worth it to me.

    @ Emily – I would say the risks are lessened by investing in robust companies over a normal bet, but realistically speaking, if the entire market collapsed over the next 5 years due to something crazy, would anyone really be all that surprised?

    @ Jacq – I agree, to a certain extent, and while I agree that it is generally easier to exit a trade than it is to exit a bet, if I were to gamble $1,000 on a football game, and it went completely the opposite of what I thought it would, I could “sell” my bet at a discount.

    As a small value investor, I am still relying on the rest of the market to follow my lead, which they hopefully would for the most part, but until that “turn”, I could be selling “down” consistently. As a value investor, I am gambling that the rest of the market will come around to my way of thinking – realizing that there is value in the company I own shares in.

    @ Gerard – The “House” in sports betting gets a cut of every transaction made – they attempt to keep the action in alignment with their risk profile on the game. Over the long-run they’ll win because of their cut, but they are willing to gamble as much as the people betting (There have been casinos that have tens of millions of dollars on superbowl outcomes in the past few years).

  7. The difference between investing and gambling is that investing involves risk for the sake of reward, whereas gambling involves risk for the sake of risk.

    Allow me to explain:

    Your total expected return = the risk free rate + the expected return of the investment.

    So if you can buy a GIC at 2%, you’d need an expected rate of return greater than 2%, hat grows proportional to the risk involved.

    In gambling, there is no way to calculate your expected rate of return on a random event. You can calculate your odds of winning, but that’s not the same as calculating the return on your investment (indeed if you did, you’d probably see a negative return on your investment in most scenarios, far more than you’d need to decide if you were evaluating an einvestment). That’s my 2 cents anyway.

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