Are we investors or gamblers, and is there a difference?
Are we investors or gamblers, and is there a difference? Most investors like to think so, and I've yet to meet a financial advisor who wouldn't want to distance his business from the decadence of the betting office.
If by 'gambling' one means engaging in reckless and irresponsible games of pure chance, and by 'investing' one means considered and careful stake-building in businesses, then these are clearly different pursuits.
But even at these extremes, there is some commonality:
- A wild gamble may be entirely sensible if it's priced in your favour;
- Even the 'safest' blue-chip investment depends on being lucky to some extent, as unpredictable (or a least unpredicted) events can devastate share prices, and we are gambling that this doesn't occur.
Moving along this continuum, many forms of gambling, such as poker and betting on horse racing, involve a considerable degree of skill and research. If you're a better judge of bloodstock than shares, then your time and money may be better employed at the racecourse.
A key difference, some would argue, is that cards and horses are zero-sum games -- no wealth is created, and the winnings come entirely from the losses of others. When costs are taken into account, these become negative-sum games; an average player is expected to lose money.
Is that really so different to the markets? A company raising funds through a placing or IPO will, we hope, create more wealth with those funds. But from that point onward, no more money in invested in the business from those shares. Subsequent trading of the shares in the secondary market has many parallels with a casino or track:
- We buy or sell in the hope of profiting from the market's mis-pricing of the assets, i.e. from somebody else's loss (even if it's just the future gains forgone by the seller);
- Our share certificate entitles us to an uncertain future dividend stream, in the same way that a betting slip entitles us to an uncertain pay-off from a race. Their respective values, theoretically, reflect the probabilities associated with those cash flows;
- The broker in the middle takes his cut, just like the croupier, the bookie and the Treasury, turning it into a negative-sum game.
As shareholders, we do own a piece of a business, but apart from taking the dividends few of us have any contact with it or any influence on how it's run. Over the long term, the value of that ownership should increase, but that's a function of the original funds raised, management skill, and the passage of time; it has nothing to do with the act of passing the shares around amongst ourselves. (The ability to trade the shares in the market does, however, facilitate the initial fund-raising -- the shares would raise a lot less if they couldn't be sold on).
No matter how careful and deliberate I am in my investing, I think it would be dishonest not to consider myself a gambler. It's nothing to be ashamed of, and if done right it's something to be proud of.
More: Invest, Don't Gamble | Quit the Gambling Habit, Start Investing | Gamblers Anonymous
