Understanding the key differences between investing and gambling

Explore the fundamental differences between investing and gambling, and discover why informed financial decisions are crucial for wealth accumulation. File photo.

Explore the fundamental differences between investing and gambling, and discover why informed financial decisions are crucial for wealth accumulation. File photo.

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By: Auraeus Kilian

It is important to start by defining both investing and gambling. According to the Cambridge Dictionary, these terms are described as follows:

Gambling: ‘The activity of risking money on the outcome of something, such as a game or horse race, hoping to make money.’

Investing: ‘To buy something, such as shares or property, with the expectation that its value will increase in order to make a profit.’

From these definitions, it is clear that investing is based on an informed belief that an asset will be appreciated, whereas gambling is driven by hope and chance.

The appeal of gambling

Gambling often comes with an air of excitement and entertainment. As Elvis famously sang about Las Vegas, ’bright light city gonna set my soul on fire.’ Similarly, events like horseracing captivate crowds, where spectators dressed in their finest outfits hold out hope that a winning bet might change their fortunes in an instant.

Investing: the long game

In contrast, investing is often viewed as slow, methodical, and perhaps even a little dull. One might picture Warren Buffett - the epitome of patience and discipline - rather than Jordan Belfort, the infamous figure from ‘The Wolf of Wall Street,’ whose story exemplifies high-stakes risk-taking. True investing is more aligned with Buffett’s approach, where success is built on patience and long-term strategies, while the excitement and unpredictability of Belfort’s methods often resemble gambling.

When structured properly, investments can indeed create significant wealth, but this typically happens over a period of 20 to 30 years. In The Snowball: Warren Buffett and the Business of Life, an early investor thanked Buffett for helping him achieve great wealth, to which Buffett responded, ‘I didn’t make you rich, you never sold.’ The lesson here is that the key to investment success lies in patience - wealth is accumulated by holding onto investments, not by frequent buying and selling.

The core differences between investing and gambling

There are fundamental distinctions between investing and gambling, and it is crucial to understand these when making financial decisions.

Risk: Both investors and gamblers take on risk, but the nature of that risk is different. Investors take calculated risks to generate dividends, interest, or capital gains, with the goal of growing their assets over time. In gambling, the odds are stacked in favour of the house - the longer you gamble, the higher your chances of losing. In contrast, investing in the stock market, especially over the long term, historically tends to generate positive returns. Although investors may not always profit, the probability of success generally increases the longer they stay invested.

Loss: A key difference between gambling and investing is the ability to mitigate losses. In gambling, once the bet is placed, the outcome is out of your control, and you either win or lose everything. Investing, on the other hand, allows for strategies to reduce risk. One of these strategies is diversification, where investors spread their money across different assets to minimise exposure to any single risk. While diversification will not prevent losses altogether, it can help cushion the impact of market fluctuations.

Time: Time is another critical factor distinguishing investing from gambling. Gambling is typically a short-term activity - once the event is over, your chance to profit is gone. In contrast, investing is a long-term endeavour. Investors can reap rewards over time, particularly if they invest in dividend-paying companies that offer consistent returns. The longer the investment horizon, the more likely it is to generate positive outcomes.

Addressing concerns about market volatility

Some may argue that investing in volatile markets is akin to gambling, especially when the outcome feels uncertain. While market volatility can indeed cause fluctuations in the value of investments, long-term data suggests that the likelihood of making money increases significantly over time.

For example, historical data from the S&P 500 and the IA SBBI US Large Cap Index shows that over a 15-year investment horizon, you have a 99.8% chance of generating a profit, all other things being equal.

In conclusion: investing is not gambling

Although there are superficial similarities between investing and gambling, such as the potential for both profits and losses, the key difference lies in the approach and mindset. Gambling is based on hope, while investing is driven by careful analysis and the expectation of returns.

Making uninformed or speculative investments is more akin to gambling, but with proper research, due diligence, and a sound understanding of risk and reward, investing becomes a deliberate, strategic way to build wealth over time.

When making investment decisions, it is always advisable to seek guidance from a Certified Financial Planner (CFP®) professional to ensure your financial choices are well-informed and tailored to your goals.

* Kilian is a wealth associate at Alexforbes.

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