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What is the Difference Between Gambling and Investing?
For your Sunday reading enjoyment. A few good observations like, "Everyone needs to realize how easy the internet makes it to gamble under the guise of investing."
Slick I rate you as an experienced investor and cman (I believe you to be well schooled in investing) you are perhaps one of the most knowledgeable on the board. I rate myself a seasoned investor as I have been investing since childhood starting with a small sum my late great grandfather gave which was invested in Franklin Income Fund (his selection).
I have found through the years that it is best to parlay off some of your capital into multi positions. For me, this latter evolved into the sleeve mythology with my investing. In this way if one of the funds within the sleeve falters then there are the remaining ones that can often offer production and perhaps propel the sleeve. For me, my system works but it requires a good number of funds to implement with twelve sleeves and three to six funds within each sleeve, the exception being the two cash sleeves where only cash type assets are held.
This strategy comes from a betting format that I used at the dog tracks. Instead of just betting one dog to win I found my success was greater if I bet three dogs across the board (win, place or show). Take this weekend’s Kentucky Derby if one bet three of the horses that were commentators’ picks just $10.00 each (California Chrome, Wicked Strong and Danza) across the board (win, place or show) then they would have collected about $89.23 form the pay out window. California Chrome with its odds would have paid out about $65.92 from the win, place or show bet, Wicked Strong was out of the money, and Danza would have paid out about $23.31 for the place. Now if you only bet one horse to win and you did not pick the winner where would you be? “Out of the Money!” The same $30.00 bet on Calfornia Chrome to win would paid out about $240.00 for the win.
You might enjoy reading about some of the many betting strategies that I have linked below.
Like you slick, I have noticed when some of my funds zig others zag even within the same sector. I believe your example centered around the utility sector. I have often thought about using MMUFX as one of my growth and income equity positions and at one time I did own this fund but replaced it with NBHAX as it is also a good income generator plus it is a little more diversified (centering around the defensive sectors plus real estate).
So venturing back to this weekend running of the Kentucky Derby, my win place show strategy (across the board betting) that I have most often have used was the preferred betting strategy over the single bet strategy. Why? Even if you had picked the winner with the $30.00 bet you would now have about $240.00. The diversified strategy (win, place, show) payout was by my math about $89.23. I did not better the single bet; but, I did have the better odds of going to the payout window over the single bet strategy as I had nine possible ways to collect. Seems four of them paid off.
Have a good weekend … and, I wish all “Good Investing / Betting.”
The 2014 Kentucky Derby payouts are in. Here are the top four finishers in the race and their guaranteed payouts. 1. California Chrome – $1,240,000 2. Commanding Curve – $400,000 3 Danza – $200,000 4. Wicked Strong – $100,000
They aren’t the only ones making some money, however. There are a few very happy people out there after placing some bets. Horse Win Place Show California Chrome $7.00 $5.60 $4.20 Commanding Curve $0.00 $31.80 $15.40 Danza $0.00 $00.00 $ 6.00
I've always liked Graham's definition, which Mr. Murcko references.
Not sure I agree with the definitions Murcko ultimately offers up, but the article does make you think about the difference, if there is any, which is always good.
Old_Skeeter: I think you need to put your glasses on. Chrome paid a total of $16.80 for win , place, show. Total of $84. As for Danza,s 3/rd place show , $6.00. Total $30. $90 bet , $114 won ! ROI almost 27% !! Did you do this good at the dog track?
Have a nice Sunday,Derf P.S. Just wondering how Ted made out on the Derby.
Here is the source of my information. Yours should be the same as reported below.
Somehow, I compute it different even with revised numbers.
As it turn out the real money would have been made betting on Commanding Cure as a $10.00 win place show bet would have collected if my math is correct $163.83. Check behind me.
The 2014 Kentucky Derby payouts are in. Here are the top four finishers in the race and their guaranteed payouts. 1. California Chrome – $1,240,000 2. Commanding Curve – $400,000 3 Danza – $200,000 4. Wicked Strong – $100,000
They aren’t the only ones making some money, however. There are a few very happy people out there after placing some bets. Horse Win Place Show California Chrome $7.00 $5.60 $4.20 Commanding Curve $31.80 $15.40 Danza $6.00
Mathematically speaking, gambling is any activity where the expectedrisk adjusted return is zero or negative and you hope you are lucky enough to get positive returns. Investing is any activity where the expectedrisk adjusted return is positive and you hope you aren't unlucky enough to get negative returns.
Philosophically speaking, investing is any activity you like to do, gambling is any activity you don't want others to do.
Old_Skeeter: I thought you were using commentators pick of Chrome, Danza, & Wicked Strong to make your point. $47.20 times 5 winning tickets equal $236 for Commanding Curve at $10 wps !
Hank, thank you so very much for the discovery and posting of this comprehensive essay. It is not simply a Sunday entertainment article; it is a worthwhile fun read any day of the week.
The author really dissects the gambling/investing issue with a surgeons penetrating knife. He explores the various aspects from many dimensions which cause him to vacillate on a definitive definition for either practice. Speculation drives him into still further confusion. He certainly examines candidate definitions from diverse directions. Good for him and his open-mindedness
I am a very simple minded person, and, perhaps for that reason, do not suffer his definition uncertainty. I am not as nuanced as he is. Here are my short, tidy, and unencumbered definitions for gambling, investing, and speculation.
Gambling is a nonproductive wager on the outcome of any event.
Investing is buying at least a partial interest in an endeavor (business) whose purpose is to produce some socially useful product.
Speculation also is buying into a potentially useful product, but the risky unknowns are higher, and consequently, the odds are longer.
Gambling is merely a wealth transfer operation. Investing and speculation have a more noble societal purpose.
In all instances, the gambler, or the investor, or the speculator interprets the risk/reward tradeoffs to be positive. Only an excitement thrill-seeking person would do otherwise. These exceptions are outliers and do not compromise the profit seeking motivation of most participants.
Certainly a perfectly clean category separation is not totally possible; overlaps exist at the margins. In the investment arena, option trading can be either a gamble or a defensive wealth protecting tactic. Only the individual can really determine his target given his special circumstances. Even under his special conditions, he might well misrepresent his goals for a wider public acceptance while he submerges his true intentions.
Day traders are mostly gamblers given that the odds of a positive returns day are about 50/50. An individual who holds a position for two decades is an investor in a business. Between those two extremes, the gambler morphs into the investor. The speculator is just a less risk adverse investor who is willing to put his money into enterprises with more unknowns.
Thank you for the opportunity to express my opinion on this matter. Please recognize that it is only an opinion from a financial amateur, but one with considerable experience.
Best wishes to all gamblers, investors, and speculators, but especially to the world’s speculators. Their ranks make things happen, almost always for the better.
Mathematically speaking, gambling is any activity where the expectedrisk adjusted return is zero or negative and you hope you are lucky enough to get positive returns. Investing is any activity where the expectedrisk adjusted return is positive and you hope you aren't unlucky enough to get negative returns.
Philosophically speaking, investing is any activity you like to do, gambling is any activity you don't want others to do.
I was all set to write something about life being probabilistic and + or - EV, and then you go and post this...
Hold it for a moment. From Simon and Garfunkel’s 59th Street Bridge song: “Slow down, you’re moving to fast”.
It’s not necessarily so. Gambling need not be a negative game, and investing is not always a positive game. Whereas that is totally so in the most global sense that includes all folks for all time, it is not a given outcome for an individual with a specific timeframe. Practice frequently departs from theory. There is a situational dependency.
Too, too many exceptions exist in the real world. For a citizen who is saving for next years college bill, owning the S&P 500 is a gamble given that the likelihood of positive returns is historically 70%. For a 10 year near-retiree, it is much less of a gamble and looks a lot more like an investment. For an insurance company with an infinite life, that same purchase is definitely an investment. Timetable matters.
Investors have lost tons of money supporting business enterprises that have gone bankrupt. IPOs fail; businesses bust; the mutual fund failure rate is dismal. My family lost a truck farm investment in New Jersey during the Great Depression.
Although over the long haul historical investment returns are positive, the marketplace is often roiled by negative return years. Those who invested with the infamous Dead Man’s mutual fund managed by Charles Steadman surely did not prosper from their dysfunctional investment choice. Investing always involves some risk so guaranteed success is never an absolute certainty.
Although every casino game is mathematically designed with a house edge, that elusive edge sometimes erodes in Blackjack as the card shoe is depleted. That’s why the MIT Blackjack team of card-counters forced the casinos to modify their rules. The escapades of the team are documented in the 1962 Ed Thorp book “Beat the Dealer”. Card counters are still rudely escorted out of casinos when identified.
Gambling need not deliver negative returns to its individual participants. Certainly the lush Las Vegas casinos are ample proof that gambling can be a highly profitable business. It’s a business that redistributes wealth from the pockets of poorly informed gamblers into the pockets of these enterprises.
Anecdotally, on an individual basis, I personally have had the pleasure and privilege of knowing four individuals who were successful gamblers over an extended period of gaming. Two were part time gamblers, one became a full time professional after his retirement, and the fourth played the horses his entire life. They all carefully tallied their profits and losses; they were meticulous scorekeepers.
That fourth friend never had another occupation, yet he always had plenty of bread, in all its several meanings. He integrated his horse skill set with a deep understanding of the racetrack crowds’ psychology. Each of these gamblers prospered by knowing the rules, by adapting to changing odds, by mastering behavioral biases, and by enforcing a strict money discipline.
All gamblers are not unhappy poor losers. All investors are not prosperous happy campers.
I certainly agree that most gamblers end with thin wallets while most investors end with thickened wallets. That’s the nature of gambling which is a zero sum game and investing which is a cyclical wealth generating game with an upward bias.
On an individual basis, there are successful and unsuccessful investors, just as there are successful and unsuccessful gamblers. I acknowledge that there are more successful investors than there are prosperous gamblers.
The more rare successful gamblers work just as hard as successful investors do in developing their specialized talents, their handicapping skills, and their money management acumen. Like investors, gamblers deploy psychological and behavioral insights to gain access to the winners circle.
It’s perfectly acceptable that we even disagree on fundamental definitions. Lines get blurred across this spectrum. When fairly and openly discussed, these disagreements will be better crystallized and will enhance a deeper understanding. As Walter Lippmann wisely observed: “Where all think alike, no one thinks very much”. Amen.
I am very familiar with the concept of Expect Value so I need not review it.
As a youth, I had the good fortune to attend a High School that emphasized science and mathematics. As part of the curriculum, I was exposed to Probability Theory, Differential Calculus, Integral Calculus and other advanced mathematics courses. Expected Value was introduced about one week into the Probability studies. I continued its application during my entire working career. So, thanks, but no thanks.
If you reexamine the entire paragraph that my comment was extracted from, and also consider the overarching theme of my post, you will likely see that the example that you provided is very similar to the commentary that completed my paragraph and continued throughout the piece.
Random walks can drive a result far, far away from the Expected outcome. That’s why gaming houses limit bets and will close-down a table if a run of house bad luck happens. That unlikely event has happened several times at the famed Monte Carlo casino in Monaco.
To illustrate with a simple example that I’m sure will not surprise you, please consider the following question. What are the probabilities of getting the following precise sequences with 10 fair coin tosses: HHHHHHHHHH or HTHTHTHTHT?
Of course, since the question demands an exact match of sequence, both probabilities are precisely the same. It is ½ taken to the tenth power.
The two terms are defined at the point anyone in the financial pron business wants to write an article. For the chosen time period writer wants to fawn over a fund which has done well, it is called investing. Similarly for the fund which has sucked over the same time period, it is called gambling.
If one is invested in the stock market...wait...see? We always say investing. We never say gambling. Why?
The stock market is licensed gambling. Anyone who believes otherwise is deluding oneself. Anyone who has made enough money to live reasonably should take money out of the stock market.
People who win are called investors. People who lose are called gamblers.
Comments
Slick I rate you as an experienced investor and cman (I believe you to be well schooled in investing) you are perhaps one of the most knowledgeable on the board. I rate myself a seasoned investor as I have been investing since childhood starting with a small sum my late great grandfather gave which was invested in Franklin Income Fund (his selection).
I have found through the years that it is best to parlay off some of your capital into multi positions. For me, this latter evolved into the sleeve mythology with my investing. In this way if one of the funds within the sleeve falters then there are the remaining ones that can often offer production and perhaps propel the sleeve. For me, my system works but it requires a good number of funds to implement with twelve sleeves and three to six funds within each sleeve, the exception being the two cash sleeves where only cash type assets are held.
This strategy comes from a betting format that I used at the dog tracks. Instead of just betting one dog to win I found my success was greater if I bet three dogs across the board (win, place or show). Take this weekend’s Kentucky Derby if one bet three of the horses that were commentators’ picks just $10.00 each (California Chrome, Wicked Strong and Danza) across the board (win, place or show) then they would have collected about $89.23 form the pay out window. California Chrome with its odds would have paid out about $65.92 from the win, place or show bet, Wicked Strong was out of the money, and Danza would have paid out about $23.31 for the place. Now if you only bet one horse to win and you did not pick the winner where would you be? “Out of the Money!” The same $30.00 bet on Calfornia Chrome to win would paid out about $240.00 for the win.
You might enjoy reading about some of the many betting strategies that I have linked below.
http://www.washingtonpost.com/blogs/early-lead/wp/2014/05/02/everything-you-need-to-know-about-betting-on-the-kentucky-derby/
Like you slick, I have noticed when some of my funds zig others zag even within the same sector. I believe your example centered around the utility sector. I have often thought about using MMUFX as one of my growth and income equity positions and at one time I did own this fund but replaced it with NBHAX as it is also a good income generator plus it is a little more diversified (centering around the defensive sectors plus real estate).
So venturing back to this weekend running of the Kentucky Derby, my win place show strategy (across the board betting) that I have most often have used was the preferred betting strategy over the single bet strategy. Why? Even if you had picked the winner with the $30.00 bet you would now have about $240.00. The diversified strategy (win, place, show) payout was by my math about $89.23. I did not better the single bet; but, I did have the better odds of going to the payout window over the single bet strategy as I had nine possible ways to collect. Seems four of them paid off.
Have a good weekend … and, I wish all “Good Investing / Betting.”
Math edited and payout detail posted.
Derby Payouts are making people happy
By Courtney Sealey on ©7:31 pm
The 2014 Kentucky Derby payouts are in. Here are the top four finishers in the race and their guaranteed payouts.
1. California Chrome – $1,240,000
2. Commanding Curve – $400,000
3 Danza – $200,000
4. Wicked Strong – $100,000
They aren’t the only ones making some money, however. There are a few very happy people out there after placing some bets.
Horse Win Place Show
California Chrome $7.00 $5.60 $4.20
Commanding Curve $0.00 $31.80 $15.40
Danza $0.00 $00.00 $ 6.00
I've always liked Graham's definition, which Mr. Murcko references.
Not sure I agree with the definitions Murcko ultimately offers up, but the article does make you think about the difference, if there is any, which is always good.
Hope all is well.
$90 bet , $114 won !
ROI almost 27% !! Did you do this good at the dog track?
Have a nice Sunday,Derf
P.S. Just wondering how Ted made out
on the Derby.
Here is the source of my information. Yours should be the same as reported below.
Somehow, I compute it different even with revised numbers.
As it turn out the real money would have been made betting on Commanding Cure
as a $10.00 win place show bet would have collected if my math is correct $163.83.
Check behind me.
Derby Payouts are making people happy
By Courtney Sealey on ©7:31 pm
The 2014 Kentucky Derby payouts are in. Here are the top four finishers in the race and their guaranteed payouts.
1. California Chrome – $1,240,000
2. Commanding Curve – $400,000
3 Danza – $200,000
4. Wicked Strong – $100,000
They aren’t the only ones making some money, however. There are a few very happy people out there after placing some bets.
Horse Win Place Show
California Chrome $7.00 $5.60 $4.20
Commanding Curve $31.80 $15.40
Danza $6.00
Old_Skeet
Philosophically speaking, investing is any activity you like to do, gambling is any activity you don't want others to do.
Hank, thank you so very much for the discovery and posting of this comprehensive essay. It is not simply a Sunday entertainment article; it is a worthwhile fun read any day of the week.
The author really dissects the gambling/investing issue with a surgeons penetrating knife. He explores the various aspects from many dimensions which cause him to vacillate on a definitive definition for either practice. Speculation drives him into still further confusion. He certainly examines candidate definitions from diverse directions. Good for him and his open-mindedness
I am a very simple minded person, and, perhaps for that reason, do not suffer his definition uncertainty. I am not as nuanced as he is. Here are my short, tidy, and unencumbered definitions for gambling, investing, and speculation.
Gambling is a nonproductive wager on the outcome of any event.
Investing is buying at least a partial interest in an endeavor (business) whose purpose is to produce some socially useful product.
Speculation also is buying into a potentially useful product, but the risky unknowns are higher, and consequently, the odds are longer.
Gambling is merely a wealth transfer operation. Investing and speculation have a more noble societal purpose.
In all instances, the gambler, or the investor, or the speculator interprets the risk/reward tradeoffs to be positive. Only an excitement thrill-seeking person would do otherwise. These exceptions are outliers and do not compromise the profit seeking motivation of most participants.
Certainly a perfectly clean category separation is not totally possible; overlaps exist at the margins. In the investment arena, option trading can be either a gamble or a defensive wealth protecting tactic. Only the individual can really determine his target given his special circumstances. Even under his special conditions, he might well misrepresent his goals for a wider public acceptance while he submerges his true intentions.
Day traders are mostly gamblers given that the odds of a positive returns day are about 50/50. An individual who holds a position for two decades is an investor in a business. Between those two extremes, the gambler morphs into the investor. The speculator is just a less risk adverse investor who is willing to put his money into enterprises with more unknowns.
Thank you for the opportunity to express my opinion on this matter. Please recognize that it is only an opinion from a financial amateur, but one with considerable experience.
Best wishes to all gamblers, investors, and speculators, but especially to the world’s speculators. Their ranks make things happen, almost always for the better.
Well stated.
Hold it for a moment. From Simon and Garfunkel’s 59th Street Bridge song: “Slow down, you’re moving to fast”.
It’s not necessarily so. Gambling need not be a negative game, and investing is not always a positive game. Whereas that is totally so in the most global sense that includes all folks for all time, it is not a given outcome for an individual with a specific timeframe. Practice frequently departs from theory. There is a situational dependency.
Too, too many exceptions exist in the real world. For a citizen who is saving for next years college bill, owning the S&P 500 is a gamble given that the likelihood of positive returns is historically 70%. For a 10 year near-retiree, it is much less of a gamble and looks a lot more like an investment. For an insurance company with an infinite life, that same purchase is definitely an investment. Timetable matters.
Investors have lost tons of money supporting business enterprises that have gone bankrupt. IPOs fail; businesses bust; the mutual fund failure rate is dismal. My family lost a truck farm investment in New Jersey during the Great Depression.
Although over the long haul historical investment returns are positive, the marketplace is often roiled by negative return years. Those who invested with the infamous Dead Man’s mutual fund managed by Charles Steadman surely did not prosper from their dysfunctional investment choice. Investing always involves some risk so guaranteed success is never an absolute certainty.
Although every casino game is mathematically designed with a house edge, that elusive edge sometimes erodes in Blackjack as the card shoe is depleted. That’s why the MIT Blackjack team of card-counters forced the casinos to modify their rules. The escapades of the team are documented in the 1962 Ed Thorp book “Beat the Dealer”. Card counters are still rudely escorted out of casinos when identified.
Gambling need not deliver negative returns to its individual participants. Certainly the lush Las Vegas casinos are ample proof that gambling can be a highly profitable business. It’s a business that redistributes wealth from the pockets of poorly informed gamblers into the pockets of these enterprises.
Anecdotally, on an individual basis, I personally have had the pleasure and privilege of knowing four individuals who were successful gamblers over an extended period of gaming. Two were part time gamblers, one became a full time professional after his retirement, and the fourth played the horses his entire life. They all carefully tallied their profits and losses; they were meticulous scorekeepers.
That fourth friend never had another occupation, yet he always had plenty of bread, in all its several meanings. He integrated his horse skill set with a deep understanding of the racetrack crowds’ psychology. Each of these gamblers prospered by knowing the rules, by adapting to changing odds, by mastering behavioral biases, and by enforcing a strict money discipline.
All gamblers are not unhappy poor losers. All investors are not prosperous happy campers.
I certainly agree that most gamblers end with thin wallets while most investors end with thickened wallets. That’s the nature of gambling which is a zero sum game and investing which is a cyclical wealth generating game with an upward bias.
On an individual basis, there are successful and unsuccessful investors, just as there are successful and unsuccessful gamblers. I acknowledge that there are more successful investors than there are prosperous gamblers.
The more rare successful gamblers work just as hard as successful investors do in developing their specialized talents, their handicapping skills, and their money management acumen. Like investors, gamblers deploy psychological and behavioral insights to gain access to the winners circle.
It’s perfectly acceptable that we even disagree on fundamental definitions. Lines get blurred across this spectrum. When fairly and openly discussed, these disagreements will be better crystallized and will enhance a deeper understanding. As Walter Lippmann wisely observed: “Where all think alike, no one thinks very much”. Amen.
Best Wishes.
Expected value of a 1000 coin tosses is 50% heads. Doesnt mean it will be so in any 1000 throws. You are confusing those two.
Thank you for taking a timeout to read my post.
I am very familiar with the concept of Expect Value so I need not review it.
As a youth, I had the good fortune to attend a High School that emphasized science and mathematics. As part of the curriculum, I was exposed to Probability Theory, Differential Calculus, Integral Calculus and other advanced mathematics courses. Expected Value was introduced about one week into the Probability studies. I continued its application during my entire working career. So, thanks, but no thanks.
If you reexamine the entire paragraph that my comment was extracted from, and also consider the overarching theme of my post, you will likely see that the example that you provided is very similar to the commentary that completed my paragraph and continued throughout the piece.
Random walks can drive a result far, far away from the Expected outcome. That’s why gaming houses limit bets and will close-down a table if a run of house bad luck happens. That unlikely event has happened several times at the famed Monte Carlo casino in Monaco.
To illustrate with a simple example that I’m sure will not surprise you, please consider the following question. What are the probabilities of getting the following precise sequences with 10 fair coin tosses: HHHHHHHHHH or HTHTHTHTHT?
Of course, since the question demands an exact match of sequence, both probabilities are precisely the same. It is ½ taken to the tenth power.
Best Wishes.
If one is invested in the stock market...wait...see? We always say investing. We never say gambling. Why?
The stock market is licensed gambling. Anyone who believes otherwise is deluding oneself. Anyone who has made enough money to live reasonably should take money out of the stock market.
People who win are called investors. People who lose are called gamblers.
I'm the Vintage Freak and I approve this message.