What's the difference between investing and gambling?

One look at the dictionary will tell you that investing and gambling are, at their core, startlingly different. But there are still plenty of so-called investors who behave far more like gamblers, especially when it comes to the expectation of profit with associated risk. Let’s explore the differences, and then very importantly, examine the need to be aware of the similarities. 

According to the Oxford dictionary, a gambler is “a fraudulent gamer who habitually plays for money, especially high stakes. By its very nature, gambling involves a voluntary, deliberate assumption of risk with a negative expected value.” Quite harsh! 

An investor, on the other hand, is defined as “a person who commits capital to a business endeavour for positive returns. Investing includes the amount of time you put into the study of a prospective company, especially since time is money.”

Spreading your risk

One of the key differences between investing and gambling is diversification. Investing provides you with the opportunity to spread your risk across all asset classes, whereas gamblers throw their capital into a single pot with no loss mitigation strategy. 

As an investor, you can also prevent total loss of your capital by selling when you need to, or when you believe it’s a sound investment decision. In gambling you cannot stop your losses on a bet and get part of your money back. This is because investing is based on ownership of something tangible and gambling isn’t.

Playing the odds

In the long run, when investing with professionals, the odds are in your favour. When it comes to gambling, however, the house (nearly) always wins. This has got a lot to do with availability of information – a priceless commodity for both investors and gamblers.

Investment professionals like Prudential’s fund managers have the expertise, time and analytical tools to gather histories of local and offshore investments and they use this information – coupled with the irresistible power of diversification within their unit trust funds – to increase your odds of winning in the long run. 

If you sit down for a game of blackjack in Sun City, you have no information about what happened an hour, a day or a week ago at that particular table. You may hear that the table is either ‘hot or cold’, but that information is not measurable or relevant to your probability of success. 

There are, of course, plenty of investments where the odds can be against you, including the purchase of futures and options (best left to the professionals) and frequent trading (which may come with trading fees). Similarly, gamblers can win, because their competition could be other players (whose playing style and mannerisms they know) rather than the house. After the house has taken its share, it couldn’t care less how the rest of the money is redistributed among the players.

In it for the long haul

Another key differentiator between investing and gambling has to do with time.  With gambling, your chance to profit ends as soon as the game is over, while with investing there’s the opportunity of a future income stream in terms of dividends and interest, and there’s the alluring prospect of capital growth and compounding returns over time.  

Not so fast: There are similarities too

The greatest similarity between investing and gambling is the assumption of risk, which is intrinsic to both. Professional investors like Prudential conduct extensive analysis to determine whether they will receive the appropriate compensation for the amount of risk they assume when they invest, whereas gamblers often take on short-term risk which they mostly can’t afford.

This leads us to the unavoidable topic of trading, which is, in essence, a form of gambling. These days it’s all too easy to buy unit trust funds or shares online with the purpose of selling them in a few days for short-term gain. If you choose this route, you may well have a few wins, but in the long run they won’t compare to the return from income and capital growth that long-term investment brings. 

The good, the bad and the ugly

It would be hard to argue that investing is not a good thing, as it benefits both the wider economy and individual investors. It drives economic development and puts capital in the hands of those with the most talented and productive uses for it. And it can help your dreams come true by offering a planned strategy to grow your wealth for specific goals including retirement. 

Gambling, on the other hand, adds nothing to global economics (apart from the statutory donations gambling organizations need to make to non-profit establishments). What’s more, it can be addictive and damaging to your ability to lead a successful life. It’s no coincidence that there’s no support group for recovering investors, while Gamblers Anonymous is thriving. 

A word of caution

It’s essential for all of us to realize how easy it is to gamble under the pretext of investing. The internet has made investing wonderfully accessible, but the basic tenets of diversification, time in the market and risk versus reward are as relevant as they’ve ever been. Unless you’re prepared to put in the time and effort that true investing requires, you’ll probably be better off investing your time in growing your individual skillset than gambling on stocks and bonds you don’t know much about.  As John Maynard Keynes, the grandfather of modern economics said, “It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges.”

Prudential has a diverse range of unit trust funds underpinned by tried and tested investment principles. If you want to be a true investor rather than a short-term gambler, contact your Financial Adviser or our Client Services Team on 0860 105 775 or at query@prudential.co.za.