Anyone who’s an avid investor, even the legendary Warren Buffet himself, will tell you that it’s always a gamble. Gambling winnings, on the other hand, certainly give you something to invest with. The two are related in a way, but it’s apples and oranges. We’ll clarify the concepts, so read on.
Let’s first define these concepts, and then we’ll see where they intersect and where they diverge.
Gambling can mean one of two things; it can either refer to partaking in a game of chance or taking a risk you hope will pay off.
So gambling in the sense of wagering money on games of chance, usually in a casino, is probably what first comes to mind when you think of it. Then, we have the definition where you just take a personal risk of some kind. For example, talking to a girl who might turn you down is a gamble. Smoking two packs a day hoping it won’t affect your health is a gamble.
In either case, you are staking something you have (or don’t have if you take out a loan in order to enter a game) with the hope that it will pay off.
How is this related to investing?
Well, investing is, as we’ve already noted, something of a gamble by default. It has to do with putting your money into investment schemes, like high yield savings accounts, stocks, bonds, and so on, while you expect to make a profit.
Note that key difference?
With gambling, you hope; with investing, you expect.
Clearly, there’s an element of risk in both cases, but the risks are hedged in the latter.
Let’s break it down a bit further. Clearly, the two concepts overlap when it comes to risking something in the hope or expectation of a return.
What they also have in common is a factor of choice. You choose how much money you invest in your portfolio, and you choose how much money you go in with when playing poker. And it’s a risk because the stock markets may crash, and the persistent investor might come out with a negative return. At the same time, the lucky gambler could solve all their financial problems for life with the single turn of a slot reels.
However, generally speaking, if you invest over the long run and hold out through all those market ups and downs, you can safely expect a positive return. The longer you gamble, however, you can statistically expect a negative return, even if it doesn’t turn into problem gambling.
Casino games are not the only way to gamble; you can bet on horse racing and partake in sports betting too.
But all these involve chance and by default have an uncertain outcome.
While you’re not buying or selling anything and all you invest is the money you can afford to lose, you still have to stake something. If you define gambling as wagering your money in the hope of making more, then you agree to a much greater risk than investing.
You have to weigh out how much you can stand to lose, first of all. In games like poker, many argue that there is an element of skill. You can read the other players’ reactions, and you might have a track record of being a savvy player. Also, you have to develop discipline so that you know when to go all in and when to call it a day. Likewise, you can learn about the horse’s pedigree or about the trainer of the sports team you bet on. In those cases, you’re playing against the other bettors because their numbers help determine the odds.
But remember, you’re usually playing against the house and the house always, ultimately, wins.
So to reiterate, investing means putting in monetary funds into assets. Think of an asset as something which generates money for you and doesn’t take money out of your pocket.
Let’s do a little test!
Is your house an asset?
If you answered no, you would be correct! Because, even though you bought it back when it cost $100.000 and now it’s estimated to be worth $150.000, it’s not making you money. It could if you sold it, but if you’ve been living in it for years, the upkeep alone will have depleted your funds. Your house is technically your asset, but, in reality, it’s a money syphon.
No, if you own a house which you then rent out, that house is an asset because it generates money. Even if you’re still paying it off, as long as the rent you ask for covers it and then some, that’s a positive return of your investment. And if you just save those, let’s say, $50 that runneth over, with a high-interest rate, you could retire a millionaire!
The most serious investors will have an Investment Portfolio. This means that they will always invest in several things at once, just in case some of them go awry. A diversified portfolio like this means you’ve “bulletproofed” yourself from stock market crashes which happen every few years. The key here is patience, which is perhaps the biggest difference between gambling and investing.
Investing in the stock market is not the only way to invest; there is far more to it than just buying a stock. Long-term investors seek to have a varied portfolio, and below are some of the most common ways to invest. Below are examples of the main asset classes, namely stocks, bonds, cash, and tangible assets.
Stocks and bonds are often mentioned in the same sentence, but most people have no idea what they mean.
Buying stocks usually means buying shares of a company that you then own, and a lot of people will do this through a stockbroker. If you buy stocks in a company like Facebook, for example, you can expect the value of them to grow for the foreseeable future. If the popularity of the company goes down, you can always sell your shares and make a profit.
Bonds are not like shares that you own, they’re shares you “borrow.” So you don’t own them, but you hold onto them, so to speak, and this lets the corporation get external funding. Because a corporation is using your money to fund its business, it will pay you interest over time. So if you’ve got the time, this might be a good idea for you.
When you hear the word “commodity,” you might not know what all those rich people are talking about. In fact, it refers to materials such as oil, silver, gold, and iron. This is a very popular investment for those in the know because crude material such as oil is not taxed. So if you own an oil well in America, for example, all the money goes right into your pocket.
This is the most popular and well-known type of investing, usually in the form of a savings account. They usually do not have a high return, but even doing this is important. Statistics show that nearly 80% of Americans live paycheck-to-paycheck, and that number is even greater in most countries in the world. If nothing else, save a portion of every paycheck and let compound interest do its thing.
Investing in real estate is another popular type of investment. Depending on your method of investing, real-estate investing can become extremely lucrative if done in the proper locations and a correct way. You can purchase homes to fix them up and sell them for a higher price, or you can purchase homes to turn around and rent them to tenants for a slightly higher cost.
You can never go wrong with real estate, they say. Unless your house ends up being in a war zone and gets destroyed, it’s a rather safe bet! Like we said, you can rent out your property and make a positive return, or you can sell it when it goes up in value. It’s a win-win either way.
Here’s a little overview of the risks, strategies, and tax options in the table below.
|Risk Factor||Controlled risk. Even if you invest in papers which change value over the years, you can do so as moderately or as aggressively as you wish.||Highly risky. You’re either playing against the house or other professional players at tournaments. Whether you “mitigate” it by skill and a large bankroll, you’re still at the mercy of fate, luck, and/or the house edge.|
|Strategy||Slow and steady moneymaking with minimized volatility. You plan to make relatively small but consistent returns on usually multiple investments over the years. Some even live on compound interest alone.||Making money quickly. No matter if you play conservatively, you still end up making fast gains. It’s a very volatile strategy.|
|Taxes||Depending on where you live, certain investments are not taxed or are minimally taxed.||Depending on where you live, gambling earnings may be taxed.|
The main takeaway is the risk-and-reward factor.
While both ventures involve risks, portfolio diversification will allow the investor to mitigate risk at all times. The odds are better for the investor because, even though they’re risking money, the house is not the casino but the whole world. They might take longer to access the money while it compounds, but they know it’ll be there.
With gambling, the house always wins. And it’s time-bound, and once the tournament is over, you either come out a winner or a loser.
Interestingly, both have information gathering involved. Namely, a gambler can gather information on the other players, whether they bluff or not, or if they have a strategy or not. When it comes to stocks and bonds, the information is technically out there, but we’ve all heard of insider information. Of course, you can scope out the trends yourself, and you’re in a much better position than the player at the Las Vegas blackjack table.
It would seem the odds favor the slow and steady turtle and not the fast and impetuous hare.