The Merriam-Webster dictionary defines investing as “to commit money in order to earn a financial return”. The same dictionary defines gambling as “to play a game for money or property. Notice that the word game is used to describe gambling. In other words, investing is a respectable activity, whereas gambling is just a game, although the ultimate goal of both activities is exactly the same, which is to make money, period. The term game connotes the idea of having fun, where investing is supposed to be devoid of emotions, and only follows a logical as well as a dispassionate approach.
However, a lot of people would ask the question of whether investing is actually gambling, and up to a certain point, the question is reasonable. The difference is expectations and time horizon, Gamblers aim to double or triple their money within a fairly short period of time, whereas investors can only strive to achieve the same goal in a much more extended time horizon, sometimes years.
It is reasonable at this point to posit that the dissimilarity ends. In fact, the difference between investing and gambling can only be applied to value investors who take a slow and steady approach to investing. Investors with a shorter time horizon are more respectably called speculators, although day traders are generally expected to close out their positions within one day, approximately the same time horizon as gamblers. Here, speculators can interject that their decisions are fully informed and based on scientific analysis. Gamblers can object by asserting that successful gambling absolutely requires a certain set of skills, as well as strict discipline. End of argument?
Here is a quote from famed money manager Peter Lynch: “an investment is simply a gamble in which you have managed to tilt the odds in your favor”.
The best argument concerning the beneficial aspect of investing is that it is a positive contribution to society at large, as opposed to mainly detrimental consequences where gambling is concerned.
The biggest risk that investors have when they lean toward gambling is accurately explained by Executive Director Chris Anderson of the Illinois Council on Problem and Compulsive Gambling when he stated that compulsive gambling is not a matter of making money, it is all about “action”.
Signs That Investing Is Turning Into Gambling:
- Constant monitoring. If you have the uncontrollable urge to check on your portfolio on a regular basis, daily or hourly, the urge to take action can emerge and lead to unfortunate positions to be taken, unless a specific event on your radar warrants the close attention.
- Market timing. It is a well-known fact in the investment community that 75% of active money managers tend to underperform the market, and most of the other 25% probably cannot sustain their lucky streaks for long. If a buy and hold strategy does not seem suitable for the times, then use a buy and rebalance strategy.
- Stock picking. Picking individual stocks is best left to well-heeled investors who have ample time for research and can easily afford to lose the bulk of their investments. It is more advantageous for most individual investors to simply diversify into as many mutual funds or ETFs as can be afforded so as to gain the maximum exposure to the widest range of sectors possible.
Is investing gambling? There are just too many similarities in the two activities to discard the notion.