Last Updated on December 2, 2024
Overview
Every now and then, I come across an article or social media post that compares investing to gambling.
At best, I see people compare investing to gambling in an attempt to explain what investing is (albeit it results in a very misleading explanation). At worst, people liken investing to gambling to try and dissuade others from investing or from learning how to invest.
Nothing agitates me more than hearing this comparison, because the people who make this claim usually fall into one of three categories: 1) they do not know what the definition of investing is, 2) they conflate investing and gambling as being the same thing, unknown to them that they are different, or 3) are aware of the difference between investing and gambling, yet still decide to conflate them to mislead others.
In my experience as an investor, the argument that “investing is just gambling” is completely ridiculous, is a dangerous mindset to have and is for the most part, false.
Investing and Gambling Compared
Before we continue, let us first examine the definitions of investing and gambling.
The definition of investing I use throughout all the articles on ilucidy, and the one I adhere to, is the following:
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Security Analysis, Sixth Edition, page 106.
According to the Merriam-Webster dictionary, “gamble” can be defined in a few ways; those definitions are:
“To play a game for money or property”
“To bet on an uncertain outcome”
“To stake something on a contingency: take a chance”
Just from looking at the definitions, we see that investing and gambling are entirely different activities.
An investment operation must promise the investor, after performing analysis, that two conditions are satisfied: their money is safe, and they will receive more money in the future.
A gamble has no element of analysis, and the gambler cannot assure themselves that the money they committed to a gamble is safe, nor do they have the assurance that they will receive more money later.
Weak Form of “Investing is Gambling”
An argument I’ve seen before is that both investing and gambling involve placing bets in the hope of making money later.
I admit, there is some merit to this argument.
An investment operation promises safety of principal and an adequate return. The keyword here is promise. Promises can be broken, and no doubt many investors in the past have had that promise broken when their investments go sour. A promise and a guarantee mean entirely different things – do not make the mistake of conflating these two words.
There is always an element of uncertainty when investing, and there is no such thing as a 100% safe investment. Even bonds from the best issuers, such as government bonds from advanced economies, have a very small, but non-zero, chance of the bond not being repaid.
Both investors and gamblers make decisions without knowing every single fact. Both types of people aim to minimize the risk of loss while maximizing the probability of future gain.
Gamblers, specifically professional gamblers, seek to control their risk of loss through probability. They place bets on activities with a high chance of winning to offset the potential losses they may suffer from riskier bets.
However, the investor can greatly reduce their risk of loss by performing thorough analysis and can use past and present data to make reasonable inferences about what to expect in the future.
I’ve previously mentioned that the past is not a perfect indicator of the future: there is no guarantee a strong enterprise today will remain a strong enterprise 20 years later.
Although the past is not a perfect indicator of what to expect, it does provide a reasonable estimate of what the future may hold.
Imagine a person who, for the past 30 years, has maintained a credit score of “excellent”. A lot can happen in three decades; maintaining an excellent credit score for that long is no easy feat.
If I were to grant this person a 5-year loan, there is no guarantee I will have my loan repaid in full: there is always the possibility of major economic upheaval down the road or some other cataclysmic event (no one in 2019 would have predicted the socioeconomic fallout of a COVID-19 pandemic, let alone believe a pandemic of this scale was possible).
Now, what if I told you that not only has this person maintained an impressive credit score for so long, but they also possess a diverse investment and business portfolio (stocks, bonds, real estate, full ownership of several private businesses) across different industries and different countries.
This individual’s impressive history (30 years of excellent credit) coupled with a very reassuring current financial situation (very diverse investment and business portfolio) greatly increases the likelihood of getting my loan repaid in five years.
I’m not guaranteed to get my loan back, but I can say with reasonable confidence that I’ll probably get my money back.
This ability to assess the past and present to make inferences about the future is what differentiates investors from gamblers.
Investors and gamblers both face the possibility of loss, but an investor can greatly reduce that possibility through the power of analysis. The best a gambler can do is gather historical gambling data and adjust their probabilities: they cannot make the same inferences an investor can.
Investing is not Gambling, but Speculating Definitely is
While investing and gambling is not the same thing, it is safe to say that speculating and gambling are.
Remember, a speculator is the exact opposite of an investor. That is, they do not perform thorough analysis, and they put their money into assets that do not offer safety of principal nor an adequate return.
Put another way, a speculator is someone who buys an asset with the hopes of it increasing in value, uncertain whether that possibility is going to happen or not. That sounds eerily familiar to what a gambler does.
People repeatedly conflate investing and speculating, then subsequently conflate gambling with the already jumbled idea that investing and speculating are the same.
Investing and gambling are not the same but speculating and gambling are. Do not make the mistake of conflating all three ideas into one concept, like what many people do on a regular basis.
Wrapping Up
The argument that investing is nothing more than gambling with extra steps has been peddled time and time again by investment skeptics.
This false notion is perpetuated because so many people simply do not know what the definition of investing is, but instead choose to conflate the ideas of investing and gambling as the same thing based on half-baked knowledge.
Any person with even a modicum of critical thinking will recognize that investing and gambling are not the same thing, and that conflating the two ideas is ridiculous.
The next time you come across someone pushing the idea that investing and gambling are the same thing, chances are they conflating the two ideas, do not know what investing actually is, and are not investors themselves.
