TLRD
Purpose: Gambling is typically done for entertainment or the thrill of the risk, while investing is done with the goal of making money through long-term growth or income.
Risk: Gambling involves high risk and is often based on chance or luck, while investing involves calculated risk and is based on research and analysis.
ROI & time of return: The return on gambling is often uncertain and can be lost as quickly as it was gained, while the return on investment is based on the underlying value of the investment and is more predictable over time.
Regulation: Gambling is often regulated by governments to protect consumers, while investing is less regulated and relies on market forces and transparency.
In summary, gambling is focused on short-term gain through chance, while investing is focused on long-term growth through informed decisions.
Definitions
The debate between investing vs gambling is a popular topic among investors. The line between the two are thin and many argue that they are both essentially the same. Let’s look at some definitions by Investopedia:
- “Investing is the act of allocating funds or committing capital to an asset, like stocks, with the expectation of generating an income or profit.”
- “(Gambling) means risking money on an event that has an uncertain outcome and heavily involves chance.”
The keywords in the definitions are underlined. Let’s have a look at them:
- “an asset” refers to a financial asset. A financial asset is a type of investment that has monetary value and can be traded or sold. Shares of public companies are financial assets because they hold value and can be traded on the stock market. But a typical business contract with a clause that a contractor must provide the service himself cannot be considered to be a financial asset because the clause states that the contract cannot be traded.
- “expectation of generating an income” refers to the expected value of an investment. If you invest in the S&P500 over a period of 30 years, it is largely agreed that the expected value of your investment is about 7% interest per year (average). On the other hand, the expected value of Blackjack is slightly negative in a standard game of Blackjack with a single deck.
- “an event” refers to a thing that happens or take place, such as goals scored in the World Cup. This can also be applied to financial assets, such as the performance of a company’s sales. But “event” in the context of gambling is usually shorter-term event, instead of the share price of a company which depends on a number of factors, and not just on the performance of its sales.
- “heavily involves chance” refers to the fact that the outcome of the event is up to chance or luck. You will have no ability to influence the outcome. For example, you can’t do anything about the cards you’re handed in a game of Blackjack. But if you were to purchase the shares of a private coffee company, you could use your connections to help the coffee company distribute its product into supermarkets, which will help increase the coffee sales and the value of your shares in the company.
Obvious cases
Let’s look at some obvious examples of investing and gambling:
Investing
- You purchase 10 shares of VTI.
- You purchase $500-worth of Singapore Savers Bonds (SSB).
- You expand your wedding catering business by acquiring a wedding dress shop.
Gambling
- Going to the casino to play blackjack. This is not investing because you’re not buying anything. Instead, you’re placing a bet on some outcome.
- Going to the racetrack to bet on the winner of the race.
Tricky (not so obvious) cases
But they’re a few cases that are not so obvious. Some may classify them as investing and some may classify them as gambling.
Purchasing Bitcoin
Bitcoin is used by many for online transactions and as a store of value (like gold). Purchasing Bitcoin can be viewed as gambling if the purchaser intends to bet on the price of Bitcoin increasing or decreasing, and makes a sale quickly. But Bitcoin can be traded and since its founding in 2009, its value has gone up which means that its expected value is positive.
Putting money into a Ponzi scheme
When you put money into a Ponzi scheme, there is a high level of risk because you are depending on the Ponzi scheme’s ability to get more investors to pay you back your capital. They rely on the constant flow of new investors. While you can influence this event by inviting your friends and family, Ponzi schemes are not sustainable once their operations has been revealed and thus your expected return is negative, which puts a Ponzi scheme under gambling.
