Gambling, Risk, Investing. Oftentimes, we see these words being used interchangeably. But how similar are they really?
Today, our very brilliant Executive Manager, Alicia Hernandez, will test this theory and decide once and for all – is investing just rich people’s gambling?
Get into it below!
This article is a 7 min read.
Do you really believe that? Well, let’s take a look at it.
Gambling involves taking risks with your money and you have little or no control over the outcome. You wager your money with the hope that it will bring you great rewards. The outcome is dependent on a great degree of chance set of probabilities that are established by the “house” or the owner of the casino. These probabilities are sure to be set in favour of the owner.
So is investing really the same thing? Let’s take a look at some of the key differences between Investing and Gambling below:
One of the key differences between investing and gambling is your ability to to control your losses.
When you invest, your return or loss is possible from sources such as price appreciation (depreciation) and (no) income from dividends. However investment strategy dictates that a prudent investor spreads their capital across different classes and types of assets so the chances of making a loss are similarly balanced. In addition, investing requires consistent thought, strategy and an understanding of the markets which allow for you to make changes to your plans based on the information at your disposal.
When you gamble, it is unlikely that you are able to make changes to your plans based on any new information at your disposal. It’s not a process with a focus on strategy so you really have no way to control your losses – you either win or lose and there is no way to regain some of your money by selling off your position or part of your position.
When you gamble you are spending money but own nothing. When you invest in equities for example, you have an ownership stake in an organisation in the form of stock. And you get paid for holding the stock in the form of dividends.
Since you own the asset when investing, this gives you the opportunity to review and rebalance your portfolio, depending on the market conditions and your individual objectives. This is where an experienced portfolio manager can assist.
Even if you make a windfall in profits from gambling, the probabilities are stacked such that the house always comes out as the winner over the long term. Investing on the other hand is structured such that although you may experience gains and losses in the short term, over the long term the investor will generally experience capital appreciation and income.
When a gambler places all of their cash on a bet and wins, they are rewarded for the risk taken immediately. Most of the time however, they walk away having lost most or all of their money.
On the other hand, a prudent stock investor does not expect to gain a windfall as soon as they invest. This does not mean that a stock investor will always enjoy a positive return. It is simply that over time, if you keep playing, the odds will be in your favour as an investor and not in your favour as a gambler.
But if you are lucky enough to win at gambling, my advice would be to thank your lucky stars and start your investment strategy immediately!
So, whether you make your initial investment from a lucky strike, or from a planned savings effort, your road to creating wealth should be built around the fact that returns are a long term goal.
Achieving this goal requires:
