Gambling vs. Investing

Gambling vs. Investing

Have you ever heard the phrase, “The Wall Street Casino”?  Or that “you may as well go to Vegas as buy stocks”?  

These phrases imply that buying stocks, investing in stocks, bonds, or other asset classes, is the same as going to the Roulette wheel and putting your money on Red.  That implication is wrong. Buying stocks or bonds is “Investing”, whereas Roulette is “Gambling”.  

How and why are they different?  Mostly because Gambling outcomes and therefore payoffs are binary.  You either win or you lose, and you are paid off accordingly.  The odds in Gambling are always stacked in favor of The House.  In my Roulette example, there is Red and there is Black, but there are also two Green holes (Zero and ZeroZero), meaning your odds of winning by betting Red are less than 50%.

In Investing, however, payoffs are not binary.  You can be kind-of right, and win a little, or really right, and win a lot.  If you are wrong, you may lose some, but you probably won’t lose your entire investment, as you would in Gambling.  Investing has degrees of being right and wrong.  In addition, Investing plays out over time – one event (such as the spin of the Roulette wheel) does not determine your outcome.  If you don’t like your Investing outcome today, wait a while, and it may very well improve.  

Secondly, you can easily hedge your investments, which is not as easy to do in Gambling.  Hedging tactics include Diversification strategies, including buying several unrelated or uncorrelated stocks instead of just one, or buying a Mutual Fund or an Exchange-Traded Fund (ETF), which may be just one security in your portfolio but which in turn owns shares of many companies.  Owning different asset classes such as Stocks, Bonds and Real Estate is another way to hedge.  In Roulette, you can “hedge” by putting your chip on the corner where 4 squares meet, so that you get paid off if the ball goes into any of those holes, but your payoff is reduced proportionately.  Not so with investing – you can hedge and still win on all your investments at the same time.

Lastly, despite what some Prophets of Doom may tell you, the Investing odds are not stacked against you.  In “Flash Boys”, Michael Lewis (same author as “Moneyball” and “The Blind Side”) shows how some traders Front Run and earn very small fractions at the expense of other investors.  This may be true, but keep in mind that these Front Runners are making very tiny fractions of decimal points on trades, and making money at it by committing millions of billions of dollars.  As an Investor, don’t get turned off by this.  If you have to pay an extra hundredth of a tenth of a cent per share because of front running by others, but you are holding for a long term, you basically will not be affected.  Not anywhere near the effect of the House Rules in Las Vegas.

If you are affected by the extra hundredth of a tenth of a cent, then you are not Investing.  Instead, you are playing a different game called Speculation.  Speculation is somewhere between Gambling and Investing.  In Speculation, outcomes and returns are not Binary, but the chances that it will not work out are much higher than normal Investing.  Investing is owning a Mutual Fund or a portfolio of companies.  Speculation is owning part of a pre-IPO high tech company.  Most wealthy people do not Speculate on their own.  Instead, they give their money to Venture Capital or Private Equity firms whose role is to use their collective knowledge and experience in an effort to minimize the risks of the Speculation and maximize the returns.  This is the same role that a Wealth Advisor or Investment Manager plays to an Investor.  

An investment firm called Indus Wealth, which is based in India (who wouldda thunk?) has a .pdf file that I think compares Gambling with Speculation and Investing in a really good way.  Here is a link to that .pdf file:

One of the best points of the Indus Wealth .pdf is what the Gambler, Speculator and Investor should hope to accomplish.  The Investor should be looking merely to build wealth; the Speculator, to risk their capital for a big payoff; and the Gambler, to have fun.  The payoffs of these three undertakings are commensurate with their best expectations.


Wall Street is called a Casino probably by those who have lost money at it, and the media narrative that it is a casino is a false one.  Investing is a good thing.  Our Country and our Civilization were built by Investors.  The S&P 500 Index is a positive number – that means Growth is the natural state of things, and it means that the Most Likely Case is that the Investor will make money, especially over the long term.  If you are Investor, but you are still concerned about jumping into the pool, or maybe you haven’t been in this particular pool before and want some guidance, employing Wealth Advisor or Investment Manager will help ease your concerns.  Want to invest but don’t have enough money?  Then don’t spend as much and save your money.  

In a future blog post (maybe the next one, but I haven’t decided yet), I will compare Investing with one of my favorite hobbies, Horse Racing.  They are more comparable than Investing and Roulette, but still not the same.