Some people refer to gambling and investing as synonymous. But are they really the same?
What is gambling? Isn’t it placing a wager with an unknown outcome? That’s part of it but there’s more to it. If you think of placing wagers in a casino in a game like craps, blackjack, or even slots, there are several aspects to this. I use this example because I think many or most people have the idea of these types of games in their head when they think gambling (then they link this to stocks). Another example is the lottery ticket which is slightly different than the other games mentioned above. Here are some facts about these casino games:
You place a wager of an amount that is known.
You have a known probability of winning before placing the bet.
The amount that you will win or lose is known beforehand.
The outcome determines if you win or lose and this completes the bet (i.e. the outcome ends the game). Also, the outcome is usually an instantaneous event like the roll of the dice or the pull of a lever.
The game has a negative expected value. There are some exceptions to this particularly in blackjack; card counters can increase their odds at certain points, giving them a positive expected value which allows them to adjust their bet amount to have an overall positive expected value.
The lottery ticket is slightly different because #3 is not exactly known because it depends on how many people place bets. Similarly, horserace betting adjusts the payout for certain bets depending on the ratio of aggregate bets placed; for example if many people bet on horse #9 winning then the payout for that horse declines.
So how is investing different? Of the 5 above facts on gambling, only #1 is always the same. In investing #2 and #3 are unknown and different people make different predictions about these. Also #4 is different; in gambling the roll of the dice decides the outcome while in investing there is usually not a single event that determines the outcome; you can stay invested in a stock for 1 day or 50 years with the return changing every day that the stock is trading in the markets. The point #4 is a very important distinction because you can be “wrong” initially but still make a profit by just waiting. Point #5 is the most important difference between gambling and investing. The stock market has gone up on average over an extended period. The underlying companies and underlying economies are expanding in value. The earth is not closed system because the sun is continuously adding energy which is used to do work which increases value of assets and is used to create assets. Therefore, while most gambling has a negative expected value, most equity investing has a positive expected value. You can put your money in the S&P500 and if you wait 50 years you will almost certainly have a lot more even after adjusting for inflation. If you repeatedly put the same amount of money in a slot machine and that slot machine on average returns 98 cents for every dollar then you will eventually lose all your money.
People who say that investing in stocks is gambling or like gambling are either ignorant about the definition of gambling, don’t understand enough about the companies and financials that drive the success of the underlying business, or “invest” in a way that is akin to gambling (maybe day trading could be considered a form of gambling). Of course, there is speculation in stocks but with careful and diligent analysis one can greatly stack the expected value far to the positive. This is not gambling.
Now with respect to equate investing in NKTR as equivalent to buying a lottery ticket, that’s just silly. You cannot study the number of a lottery ticket and have it affect your chance of winning. It is completely random. The only thing you can do with a lottery is compare the size of the price pool, the odds of winning, and calculate your expected return. Hypothetically, even a lottery can have a positive expect value assuming that the payout is sufficiently large. For example, if the prize pool is $5B and your odds of winning are 1 in a billion then you have a positive expected value even adjust for a huge tax bill (assuming more than 2 people don’t win the prize). Similarly, biotechs can have a large payout and if you can pick the companies that have a better chance to win (create value) and the payout amount compared to the investment is favorable…
Chris, an investor and a poker player who considers neither gambling
Of course, there is speculation in stocks but with careful and diligent analysis one can greatly stack the expected value far to the positive. This is not gambling.
It’s about the odds. It’s what made Moneyball (another book and movie) work for the Red Socks (and almost work for Oakland). Play enough baseball games right and the stats are in your favor. Play enough hands of blackjack right and the stats are in your favor.
I’ve said it here before: Making money in the stock market requires predicting the future better than other investors. We all knew that Amazon was a great company with a great future many years (decades?) ago. The issue was whether it was a better company than it’s stock price (and result PE, etc.) indicated. The bet on AMZN wasn’t whether the company would be successful or not, it was whether it would be more successful than its stock price indicated it was.
That’s harder, and it moves all the time. It’s why stock prices move on a nano-second by nano-second basis as people and algorithms are constantly evaluating the odds of success versus the current prices (including options in this as well).
BTW, my take is that many years ago a rational analysis of Amazon would have indicated that it wasn’t worth what the stock price indicated. What “saved” Amazon were things like AWS, which could not have been predicted 12-14 years ago. Amazon “stumbled” into that business, which started out as a way for them to help reduce the cost of installing so many servers needed to handle the XMas rush by renting that CPU power out the other 10-11 months of the year.
So, like in gambling, one can get lucky in investing as well.
<People who say that investing in stocks is gambling or like gambling are either ignorant about the definition of gambling, don’t understand enough about the companies and financials that drive the success of the underlying business, or “invest” in a way that is akin to gambling (maybe day trading could be considered a form of gambling). Of course, there is speculation in stocks but with careful and diligent analysis one can greatly stack the expected value far to the positive. This is not gambling.
According to Merriam-Webster:
Definition of gamble
gambled; gambling play 'gam-b(?-)li?
intransitive verb
1 a : to play a game for money or property
b : to bet on an uncertain outcome
By this definition, investing in the stock market is a type of gambling. The outcome is uncertain. You may win or lose. But there are critical differences between gambling in the stock market and other games of chance like the lottery, casino or sports betting. Money bet in the stock market is used to buy a tangible asset, shares in a company, while the latter buys only a chance to win the wager, no tangible asset. Moreover, the odds are overall in your favor in the stock market whereas the opposite is the case with the latter. In the stock market, people overall almost always win. In the latter, people overall almost always lose. A broad based bet on the market always wins over several decades and you will not lose everything on such a bet as long you don’t use leverage.
dave, an investor who considers the stock market a form of gambling and doesn’t play poker
The stock market is very similar to sports betting and poker. There are professional gamblers who make a living at both. There is a strong element of skill required to succeed at both unlike investing where anyone can do well merely buying index funds. Investing like Saul is very strongly comparable to sports betting and poker. Concentrating a portfolio because you make a judgement you’ve got a significant edge is still gambling.
A sports betting event or poker hand has a good chance of failure even if the judgement leading up to putting down your money was correct. The best players are not results oriented but instead focused on the process and manage their bet sizing to grind out a long term win by trying to get their money in good. Sports betting requires you to win 52.4% of the time to break even doing standard bets of 110 to win 100. There are people who beat that and are long term winners. Poker is similar.
I’ve said it here before: Making money in the stock market requires predicting the future better than other investors.
This statement is simply untrue. You don’t need to beat other investors to make money. It’s mathematically incorrect because on average the stock market goes up.
an investor and a poker player who considers neither gambling
Years ago I had a rather humbling experience with poker. Played a fair amount with familiar players. Learned their strengths, weaknesses, common tactics and strategies. I thought I was pretty good at it until I sat down at the table (unknowingly, of course) with somebody who played me like a fiddle. The sad part was, after a while, I could see it coming but was helpless to do much about it. When I left with my tail between my legs, and wallet a lot lighter, I understood I was gambling. Not with the cards, but with my assessment of my own skills vs. another at the table.
So while I agree that neither are gambling in a pure sense, both areas require an element of having good processes for assessing who you are playing with.
So to bring it back to NKTR, there are probably some holders here who are gambling, and others who are not.
I’ve said it here before: Making money in the stock market requires predicting the future better than other investors.
“This statement is simply untrue. You don’t need to beat other investors to make money. It’s mathematically incorrect because on average the stock market goes up.”
Actually, it is a true statement.
When you buy stock in a company, you are investing in it because you believe the value will appreciate in the future.
Who did you buy it from?
You bought it from someone who was not convinced the company would be a good investment and would not appreciate in the future. Why else would a normal seller sell? (This excludes emergencies, etc)
I think (which isn’t worth much) that success comes by knowing what a company is worth before the other guy. Hence, Saul’s knowledge base articles on how to do this.
This comes in on all levels. When encountering a Grizzly bear, you just don’t want to be the slowest runner in the group.
*Investing is knowing that the odds are in my favor going in. I’ve couched the odds in my favor by studying the company and running various valuation scenarios, and buying when the price is favorable to those valuation scenarios.
*Speculation is going in without knowing the odds. I’d put Bitcoin in this category. I have no good way of figuring out what Bitcoin is worth so I don’t know what’s a good price to buy and sell it at.
*Gambling is knowing the odds are against you but going in anyway. I’d put buying lottery tickets and most games in Vegas in this category.
That’s not to say you can’t lose money investing and win money gambling (as we all know), but long term over many hands, investing should give you more winners than gambling or speculating should. That’s also not to say gambling doesn’t have its place. I’ve been to Vegas many times and it’s a lot of fun, but I don’t look at them chiefly as revenue raising trips.
I read an interesting long form article a few months ago about a couple that figured out a loop hole in some lotteries and ended up exploiting it. I think they started in Michigan, then found a comparable game in Massachusetts and ended up going head to head with a group from MIT that had discovered the same flaw in the game. Both groups had raised a decent amount of capital as part of the playing the lottery with the odds in their favor. Sorry I don’t have a link available at hand not recall the publication, but it was an interesting read that goes along with the line of thought GauchoChris has laid out here (which I found to be quite salient points similar to a Saturday post he made here a month or so ago about money managers and how we on this board differ from them).
volfan84
Long GauchoChris’s insights most of the time (see: NVDA & NKTR)
You bought it from someone who was not convinced the company would be a good investment and would not appreciate in the future. Why else would a normal seller sell?
Who you buy from is completely irrelevant. As an example, if you bought 1 share of MSFT from Bill Gates, do you think he thinks it’s a bad investment? People sell for all kinds of reasons that have nothing to do with if the shares will rise. Heck, Saul sold some NVDA to buy some TWLO. He still holds NVDA so he must think it’s not going to lose money.
I wrote: Making money in the stock market requires predicting the future better than other investors.
GauchoChris: This statement is simply untrue. You don’t need to beat other investors to make money. It’s mathematically incorrect because on average the stock market goes up.
It’s incorrect (both mathematically and otherwise) to equate what happens to an expanding market (which includes new companies) to what happens to a single investment in one company. It’s like saying Chipotle is growing because it’s building new stores and so total revenue is going up, but the truth is that same store sales are declining. If I’m invested in, say, a dozen stores, it doesn’t help me that the sum total of all stores’ revenue is increasing because my dozen show declining revenue.
I gave concrete examples to demonstrate my statement, and no “stock market average” behavior invalidates what happens to individual stocks. All that statement does is support Buffett’s easy way to invest by buying the S&P.
Think about it: Saul’s analysis requires not only identifying companies that will grow in the future, but that those companies NOT have that future growth already priced into their stock price. If everyone knew how much a company would grow in the future, then stocks would be literally priced for perfection since everyone would know that future. But, we don’t know the future, and so what we do is try to predict the future better than everyone else has, so when other people eventually realize we’re right, they will bid the stock price up to the level we already figured it would be.
Yeah, it’s not exact, but the general goal is to recognize what the company will be before too many others do.
“Saul sold some NVDA to buy some TWLO. He still holds NVDA so he must think it’s not going to lose money”
He sold NVDA to buy TWLO because he expe3cted TWLO to have better future growth potential. The people that bought his NVDA thought it had better potential than whatever they may have sold or considered buying.
Bill Gates sold some MSFT to diversify his holdings, to fund living and for charity. Those reasons and some others do not necessarily have a “value” incentive.
This past Wednesday, we transferred some NFLX shares to a charity, 1.7% of our portfolio. It lowered the position from over 21%. The cost basis is $3.08/share so it is a prime candidate for gifting to charity rather than selling. The charity will sell it to get the cash.
There are all sorts of reasons other than performance to sell stock.
But, when the majority of sales are made by investors that want a “better” investment than the one they are selling.
When encountering a Grizzly bear, you just don’t want to be the slowest runner in the group.
I used to camp out solo in wild country in a tiny tent. Before I set out, I diligently studied what to do and what not to do when encountering wildlife.
The worst thing to do when encountering ANY bear is to run, according to wildlife experts. Bears can run up to 60 kilometers per hour (about 37 mph) whereas we humans are among the slower mammals at about 8.3 mph. When you run your are seen as prey by any canine, either bear or dog. NEVER RUN, move away slowly or stand your ground, avoiding eye-contact: http://www.pbs.org/wnet/nature/the-good-the-bad-and-the-griz….
The same goes for investing. I try to study the territory before I enter it and make notes when I should Hold’m and at what point I should Fold’m. That prevents me from running and liquidating a position at the worst possible moment.
I also believe that to do nothing is usually a better option than to run (panic).
But, when the majority of sales are made by investors that want a “better” investment than the one they are selling.
Does that help you?
Hi Gene,
YEs, I see that you are trying to explain this to me. However, there’s a problem with at least 2 of your underlying assumptions that are leading you to an erroneous conclusion.
The first is that I think you seem to believe that investing is a zero sum game when it is really a wealth generating game with values increasing on average. Therefore, on average people can earn money by stock investing.
The second false premise is that you seem to believe is that every time (or the majority of the time) a stock is sold is it because someone believes that this stock will do worse than another stock. This assumes that they have actually analyzed the company and reached a conclusion that there’s something greener. I was an investment advisor and I met many other investment advisors. Most rely on others for their research but more importantly most investment advisors are asset allocators who put their clients into ETFs or mutual funds without analyzing the underlying companies. I’m pretty confident that most stock buying and selling is due to buying and selling mutual funds or ETFs. Sure, you can argue that the mutual fund managers are making decisions by analyzing, but they have a lot of restrictions that force them into suboptimal decisions. Therefore, investors to a large degree are not really analyzing companies but rather are investing in things like the S&P500.
What we have is a system (i.e. the stock market) which on average goes up. Therefore, the average holder of equities will make money. Therefore, you don’t need to do better than the average to make money (i.e. a positive return).
I’m going to stop posting to any responses on this thread now because it’s not adding any additional value to the board.
To Chris’s point, I heard this stat this week. Currently about 90% of all stock trades are from quants, momentum traders, ETF’s, ETC. Only 10% are from investors doing fundamental research.
The stat was from a money manager who was making the case investors who do fundamental research have an advantage, because most aren’t.
I have a relative who has done very well just buying and holding SP500 proxy , over and over every year for 30 years. The only assumptions he made was that our American form of government would survive and that stocks go up more than they go down. He never panicked ,he never got greedy ,he just stuck to the plan.
Capitalism works.
When I suggested to my daughter she consider being more aggressive with her investments, instead of all BRK-B, she said that sounded like gambling. I shrugged and agreed.
But, isn’t all investing gambling? It seems if we want to differentiate the two words, investing is choosing to apportion some funds, whether in stocks, land, or a big bag of cheese doodles, and gambling implies the risk of return.
So, if I invest in a big bag of cheese doodles I am gambling I will receive more pleasurable cheesy crunch than excess caloric intake and guilt.