Monday, August 22, 2005

Gambling and Investing 2 comments

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To many investors, especially the successful ones, linking their precious art to the common-place "sin" of gambling horrifies them. They prefer to see themselves as professionals using logic and understanding to trade the markets, not like the punter who places himself at the mercy of fate.

I have no such repulsion towards gambling and indeed I engage in sports betting regularly. It might explain why I often see parallels between gambling and buying stocks on the stock market, whether one is trading or investing.

Firstly, both activities involve doing some logical thinking and identification of the key issues in order to increase the chances of succeeding. The importance of doing research and scuttlebutt on the company one is investing in has been preached so often that I need not go into it further. However, I often feel the importance of doing some due diligence and exercising one's judgment and instinct in gambling is understated. If I am looking at an Arsenal match, isn't it important to find out whether Theirry Henry is playing or not? Similarly, looking at the odds offered and thinking whether it is worth a bet involves some degree of probabilistic thinking. A veteran gambler would choose to play European-style roulette (one "zero") rather than American style (two "zeros") as house advantage is less. And who has heard about how some students from a US Ivy-League university made millions at casinos using card counting techniques before they were banned?

The second similarity between investing and gambling is that both in essence involve a leap of faith. What I mean by "leap of faith" refers to both activities involving the individual having the "courage" to put something close to his heart --- money ---on the line to back his belief. One can do loads of research but without an appetite for risk, the gambler's appetite, the investor will never be able be bold enough to commit substantial amounts to his stocks, being overly fearful of failure. This is a symptom of many stock market commentators talk the talk but do not walk it; the more they know about the market the more fearful they become. This to a certain extent is understandable but then again does not make perfect sense since surely, greater understanding of the key issues and of what to avoid itself confers a certain advantage on these veteran commentators which they should press by committing more funds? Exercised in moderation, the stomach for taking risk brings potentially huge rewards; the investor is not limited in his investment scope by the riskiness of the instrument. The risk-taking spirit clarifies, cuts through, and captures the essence of the evolutionary spirit, to borrow a phrase from Gordon Gekko in "Wall Street".

The greatest difference between investing and gambling, in my opinion, is the factor of time. Time is the enemy of gambling but the friend of investing. Gambling has a time expiry characteristic; when the 4D results open on Saturday or Sunday, the punter either strikes it big or he loses his bet, no two ways about it. It is this characteristic that makes addiction a problem in gambling; the instant gratification, and the chance to play the same game again another round. Given that the house typically has a small advantage, it is no surprise why many gamblers lose over the long run. It is further exacerbated by the fact that it is easier to rig activities with such time expiry characteristics: it is easier (ie. cheaper) to rig the result of a knockout match rather than the champion of a season-long league championship, for example. The more imaginative could draw parallels between this time-expiry characteristic of gambling with the warrants that are so hot in the market now; it is easier to push down the price of a warrant over the period when it is active (so that issuer does not lose money), rather than hold down the price of the mother stock over the long-term. In investing, on the other hand, the investor with holding power can choose when he wants to exit; nobody dictates the terms to him. There is no time expiry date before which he must sell his shares, and as long as he monitors his stocks' fundamentals and stops loss where appropriate, time is on his side.




Anonymous Anonymous said...

I see gambling & stock investing as very similiar. They both involve risk and some luck.

12/23/2007 8:40 PM  

Comparing Gambling to investing theirs a little difference between the to.

12/11/2012 4:09 PM  

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