Investing is occasionally referred to as gambling. A Google search for ‘stock market’ and ‘casino’ yields over 51,000,000 results. We’ll present the arguments on both sides of the question ‘is investing gambling?’ in this brief article.
Arguments for: Why investing is gambling
Investors place their money at risk when they invest, and a positive return is not guaranteed.
The primary reason why the stock market is compared to a casino is that there are winners and losers. Some investors make excellent returns from their investments, whereas some lose their entire investment. You can find examples of winners here, and losers here.
This uncertainty is fundamentally what underpins the long-term positive returns of the stock market. Because investors are prepared to fund businesses and take on risks, those investments are designed to return profits to the investors to reward them for taking the risk.
However, this risk and reward relationship doesn’t always hold. It wouldn’t really be risky at all if investments always returned a profit. This is why choosing what to invest in is the most important aspect of investing £1,000 or a million pounds.
Statistically speaking, the stock market has a 50:50 chance of rising and falling on any trading day.
This means that investors who take very short-term positions, known to beginners as day traders, face a coin-flip result each time they place a trade. Economics books and finance books have described this randomness as the ‘random walk’ of the financial markets.
This setup is almost identical to placing chips on red or black at a roulette table. What’s more, because they incur trading costs each time they place a trade, the odds are slightly tilted against the day trader. Day trading books explain how traders can reduce their trading costs, but they will always be a non-zero number.
The difference is that while a roulette wheel operates on pure chance, the movements in share prices is a function of real-life events, such as news, investment sentiment, trading volumes on the market that day.
Therefore, to some extent, some traders may possess information that gives them an edge in predicting whether a share will rise or fall on a given day. This small edge can be sufficient to turn an average profit from day trading rather than them losing as often as winning.
Arguments against: Why investing isn’t gambling
It is possible for all investors to grow their wealth by investing.
In bull markets, the value of all shares floated on the stock market, alongside the value of all corporate bonds, can rise. Within this rising tide, there will also be some losers (such as companies that enter bankruptcy, suffer scandal or become obsolete), however, all diversified investors would see profits.
In contrast, when gamblers sit around a poker table or place bets on roulette, a few will win whilst the remaining players will lose. Casino games are often structured so that the losses from losers playing a game will fund the payout to the winner. In some games, this is very clear cut, such that the winner will take home the losses from the other players. In other games, such as blackjack or roulette, it’s possible for the whole table to lose money, or win money, however over a cycle of thousands of games, the losses will outweigh the wins due to the odds involved.
The investing exception to this rule is when investors trade forex (see great books on this topic). The foreign exchange market is a zero-sum game, which means that if one currency rises against another, then by definition the opposing currency has lost value against the former. This means for every winner, there is a loser.
Over the long term, diversified investors have near-certain odds of turning a profit
The stock market has never ended any 25 year period lower than its starting level.
This is a powerful insight from stock market history which allows us to draw a conclusion about the risk level of long term stock market investments.
What this means is that any investor who invested £1,000 fully diversified across the stock market a few decades ago will be sitting on a profit. This totally negates the idea that investing is gambling.
Every diversified investment made in 1950 was in profit by 1975. Every diversified investment made in 1975 was in profit by 2000. This could be said of any 25 year period since the turn of the 20th Century.
With such conclusive data, it’s difficult to conceive of an investor losing money over the next 25 years. It would be a significant anomaly if this did occur.
In depth: why do stock markets rise?
It’s important to reflect on why this is the case. Why does the stock market continue upwards in an unyielding pattern over very long periods? The answer is that businesses are geared for growth. Management teams set ambitious targets, product developers innovate and engineers create cheaper ways to produce products.
Every part of every for-profit organisation is evolving to improve their productivity or profitability every year. And on average, they succeed.
Occasionally a corporate giant will meet its end after it failed to navigate a new trend (think about Blockbuster failing to compete with Netflix). And every few years, economies will enter a recession and business valuations will temporarily dip.
However, over the long term, it’s the daily grind for growth of every employee in every organization that leads to an inevitable rise in the total value of all public companies in the long run.
This is why investing is different to gambling.
- Gambling is a game which is designed to ensure that the casino or bookmaker will win.
- Investing is a bet that companies, on average, will succeed in their goal to become more profitable.
These are very different scenarios and have little in common.
In conclusion: is investing gambling?
Buying shares in the very short term could be accurately labeled as gambling. This is because the odds of success versus failure are finely balanced.
Without possessing a great deal of skill at technical analysis and investing psychology, a trader is likely to lose more often than win after investing costs are factored in.
However, over a long investment time horizon such as 10 years, the odds are firmly in an investors favour. Over even longer terms such as 25 years, a positive outcome is virtually certain and this is supported by history.
Therefore, the appropriate answer to the question ‘is investing gambling?’ is another question; how long are you investing for?