Oran Hall | Confusion over investing and gambling

There are people who argue that investing is gambling. It is true that there are similarities between them, but they differ in many ways, such as whether there is ownership and, if so, if it can change, the amount of time the money is committed for, risk management, the involvement of the market, and the role of research.

Investing and gambling are not the same.

To invest is to acquire an asset expecting it to produce a return, that is, a financial benefit. The return might be in the form of current income – interest, dividends or rent – increase in market price resulting in a profit, or a combination of both.

There are many different types of assets that can be used for investment, including business, real estate, precious metals, collectibles, commodities, and securities such as ordinary shares, preference shares, bonds, debentures, unit trusts, and mutual funds. The investor generally becomes the owner of the assets in which the investment is made, but the gambler owns nothing.

On the other hand, gambling is betting, which is risking money, often small sums, without a claim to an asset for an outcome which is generally uncertain.

People invest and gamble to get a return on their money, they involve choice, and carry risk, which is described as a variation from an expected return. In both cases, the return can be significantly more than expected, but it can be less. But there is a difference: the gambler loses all, but the investor rarely has that experience. Thus, when an investment is unprofitable, the investor generally recovers some of the principal invested.

Moreover, in cases such as investing in securities that make periodic income distributions, like dividends on ordinary and preference shares, and interest on bonds and debentures, this regular flow of income offers some return even if the investor incurs a capital loss on the investment.

Investors and gamblers aim to maximise returns and reduce risk, but investors have more ways to minimise risk than gamblers. Among the tools investors use to reduce risk is diversification, whereby they invest in several asset classes, different instruments in the same asset class, several industries, and several countries. In regard to instruments with a maturity date, investors may spread out the maturities. They may also invest during different stages of the market and select the types of orders that allow them to limit their losses. Such options and strategies are not available to gamblers.

Investing is facilitated by the market, which provides opportunities for establishing prices, which allows investors to see how their investment is doing and helps them determine when to take a profit or cut a loss. Very importantly, the market allows the investor to acquire assets as well as to relinquish ownership of an asset at a price determined by the inter play of demand and supply. In most cases, the market also is supported by mechanisms which provide for the identification of the owners of assets and thus gives them security.

Because ownership of investment assets is negotiable and there is a formal way to establish and show ownership of an asset, investors are able to provide for the joint ownership of assets and also to provide for their transfer to their heirs through the estate planning tool of their choice.

Investment is long term and ownership can continue to perpetuity if that is the desire of the investor, but only when a gambler wins is there scope to pass on anything to beneficiaries, which happens relatively infrequently.

Although both serious investors and gamblers – depending on the type of gambling – do some research before committing their money, there is significantly greater scope for investors to do research. Market and analysts’ reports are often published, and there are many proven analytical tools that are available to evaluate the performance of markets, individual investment instruments, companies, and economies. Although the best application of these tools does not give a guarantee that the result of an investment will align with what is expected, investors can at least make informed decisions.

As for gamblers, there is very limited scope to be guided by past results. In cases such as horse racing, there is, but that gives no guarantee as to future performance. Additionally, some forms of gambling are so localised, past results have little use to current gamblers, not to mention that in some forms of gambling, past results will have no bearing on future outcomes of the same type of gambling, an example being the televised gambling of local television.

Although investing is long-term in nature, it is true that some people see it as a means of short-term gain. Their approach makes it appear that investing is gambling, but this group should not be seen as being representative of investors over all. Investing and gambling are fundamentally different from each other.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com