Ask people what they think about the city traders who are responsible for investing millions on behalf of their clients and many will say that they’re nothing more than glorified gamblers.
While this is fundamentally true in that they are speculating on an outcome that can never be 100% predictable. However, there are also some key differences when we’re looking at games of pure chance. In games of skill in which the player has some influence then there may be some more similarities between investing and gambling. So let’s take a look at what’s similar and different between the two.
In terms of similarities these are mainly concerned with the qualities and abilities that both investors and gamblers need to have in order to succeed.
- Having a safe option to fall back on
This final point brings us back to risk and reward. Both gambling and investing have relatively secure, yet low earning, options that can provide a safe alternative. For gamblers this can mean playing online slots which have a relatively high payback rate – generally over 90% with the option to play for low stakes. In games like roulette, one of the ultimate games of chance, there are still ways to approach the game to enjoy success.
For example, there’s the Martingale method, in which you double your bet after a loss. This strategy works well for online gamblers in particular as they can play methodically, free from the distractions of a cramped and loud land-based casino, to focus on the game. The Martingale is one of gambling expert Frank Scoblete’s eight betting systems that can influence roulette odds in your favour. Meanwhile, investments like government bonds offer lower rates of interest which are fixed long-term.
2. Choosing your moment
Of course, it’s not just a question of having the nerve to make those big decisions, it’s also having the sort of sixth sense for knowing when to make them. In investing, this will be sensing when is precisely the right moment to buy or sell. In gambling, and particularly in games like poker, it’s knowing when to up the stakes to maximise your winnings or get out of a game that you’re destined to lose. In both instances this can represent a very narrow window of opportunity.
3. Deciding to diversify
Sometimes even old-fashioned proverbs can contain nuggets of truth that can be a real help in all kinds of areas. The expression “don’t put all your eggs in one basket” is a prime example. To put it in a more contemporary way, this means that diversification is key. So wise investors spread their money across a wide range of markets and asset classes. By doing this they are mitigating against any single market collapse.
4. Identifying patterns of behaviour
Although all investments always come with the advice that previous performance is no guarantee of future performance, there are certain patterns that investors can look for – particularly when looking at an individual company’s shares. Similarly, poker players are always looking to spot a playing style of their opponents as well as any tells that may be indicators of their strategy. These can all be very important, if not critical, for effective decision-making.
5. Weighing up risk
The very essence of both gambling and investing lies in being able to weigh up the delicate balance between risk and reward. Obviously, there is a great variation in people’s appetite for risk and the greater this is, the higher the potential rewards – but also the greater chance of failure. So it’s being able to make those tough calls and stick with them that’s going to define whether there’s going to be long-term success in either field.
Having said all this, there are also some fundamental differences between the two activities of gambling and investing.
- Investing’s a long term process
Ask any financial adviser and they’ll tell you that any investment is best regarded as something to be done over five years or more. This gives the market a chance to even out over time and, historically, it has generally been shown to rise over this period. But gambling is essentially a short-term process.
2. The economy goes in cycles
Any economist will tell you there are four distinct phases in any economic cycle, expansion, peak, contraction and trough. Depending on where we are in each cycle an investor can adjust their behaviour accordingly. But in gambling each play is completely unrelated to any event that comes before or after. So they have no context in which to act, except for where they stand in that particular game or session.
3. The house always wins
In investing, no one else has any vested interest in whether you succeed or fail. But in gambling the casino is there to make a profit, and that comes at the cost of the players. Even in player against player games, like poker, there are outside forces competing against an individual from winning. While the house edge varies between games, it’s ultimately the house that always wins. Even if some players can make gains, more will make losses – otherwise casinos wouldn’t be in business.
4. Investors can stop their losses
That’s because there are a number of options to avoid losing all their capital, for example by setting “stop losses”. So, for example, if stock falls 10% lower than its price it’s easy to sell the stock and still retain 90% of its value. But once a gambler has placed a bet it’s an all-or- nothing situation, they could potentially lose everything.
5. Investments react to outside influences
How often do we hear that stock prices have risen or fallen in the light of external events? For example stocks fell to a 3 year low following the attacks of 9/11 in 2001. But gambling carries on regardless of what’s happening in the outside world so, in this respect, it could be regarded as being more reliable and less volatile than investing – and certainly very different.
So, as you can see, there are as many similarities as there are differences when it comes to comparing gambling and investing. Ultimately, both involve risking of capital in the hope of achieving big rewards. But gambling is essentially self-contained and short term, while investing can last a lifetime and is subject to outside influences. As to what to choose to do with your money, well, that could just be a question of flipping a coin to decide.