Place Your Bets? What to Know About Investing vs. Gambling

Key Takeaways

Investing is a probabilistic exercise where gains are not assured, but it’s absolutely not gambling. As investors, we should be careful not to obscure that line.

Why Investing Isn’t the Same as Gambling

Gambling has a negative expected return over time; otherwise, betting establishments wouldn’t survive. Nevertheless, people are drawn to gambling because it has connotations of making money quickly or easily. In gambling, you tend to be making all-or-nothing bets in which you don’t own an underlying asset or have any claim on future cash flows.

Investing is the opposite. Buying a stock, for example, gives you a share in the ownership of a company for as long as you hold the stock. You’re an owner, not a gambler. A bond gives you an expected return over a known maturity (that is, a yield to maturity) as long as the issuer is willing and able to pay. There’s no all-or-nothing scenario.

Chance Versus Choice

In addition, investors have a vast array of information available to them to determine a security’s attractiveness. That information allows investors to make informed buy-and-sell decisions.

Of course, it’s still possible to lose money in investing. Your judgment could be wrong. Or the company or issuer could fail to perform as you expected.

But it should be clear that this is a radically different exercise than your profit or loss being determined by, say, a ball landing on a certain number on the roulette wheel, or the turn of a card at a blackjack table.

Gambling Terms in the Media

The financial press are constantly blurring this line by using gambling jargon or terms to describe investing. On a popular business channel I won’t name, you can’t go 10 minutes without someone using the word “bet” or “play,” as in “How should an investor play this market?”

1. Bet, play, take a flyer, double-down, go all in, side bet—these are all gambling terms. Terms to be used at a casino in Las Vegas, not for investment decision-making.

2. Or how about terms or ideas more commonly associated with gambling than investing? “I’ll stop/sell when I’m even,” is a good example. Spoiler alert: Nobody cares where you bought the stock or whether you have a gain or loss in the position.

That is not a good reference point for your decision. Profit or loss is only relevant for your tax liability. Your entry price should not be a reason to buy more or sell an investment. Rather, your buy-and-sell decisions should be based on a security’s fundamental characteristics and its role in your portfolio. When or where you purchased it in the past never enters into it.