3.5 Speculation: gambling vs investing

Speculation and Gambling

How many times have you heard someone say, ”Investing in the stock market is just like gambling at the casino”. This is partly true as investing and gambling both involve risk and choice – specifically risking of capital in the hope of future profits. But gambling is normally a short-lived activity while investing in equities can last for years.

Also,  both on average and over the long run gambling brings a negative expected return. In contrast, investing in the stock market normally brings a positive expected return in the long run.

Investing vs Gambling: Key differences

In both gambling and investing, a key principle is to minimize risk while maximizing profits. But, when it comes to gambling, the house always has the edge- a mathematical advantage over the player that increases the longer they play. 

In contrast, the stock market constantly appreciates over the long term. This doesn’t mean that a gambler will never hit the jackpot, and it also doesn’t 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 favor as an investor and not in your favor as a gambler.

You can compare investing to crossing the road: You can cross without looking to the left and to the right and get to the other side quicker. The chance is however much higher you will get hit compared to when you stop and look to the left and to the right. Looking to the left and to the right is like doing your research and spreading your investments when investing. You will probably get across the road a little bit later but the chance of you getting hit is much lower.