Why it is important to know the difference between Investing and Gambling

Updated: Feb 15



 

“My Paytm shares are down 40%! What should I do?” I was recently asked this question at a pizza party. I gave the only answer a consultant ever gives, “It depends.” “Depends on what?!” the host asked. “On whether you bought Paytm as an Investment or for Gambling?” Seeing the quizzical look, I decided to put my pizza slice down and get into the details…


Investment vs. Gambling


Investment (Expected Return: Positive)


An investment is something that will help you grow your money. The stock market historically has always gone up. There is no 20-year time period in history where stocks have gone down. So stocks can be a good long-term investment. Nothing is guaranteed, and some stocks do go down. But the overall stock market has always made people money in the long term.


Gambling (Expected Return: Negative)


In gambling, the expected outcome is negative. The house (casino) always wins – the odds are stacked against the gambler. Someone might get lucky and hit the jackpot, but on average the casino always makes more money than the players (that is how the casinos manage to stay in business). If the expected return is negative, then why do we gamble? One reason – gambling can be fun. Another reason is FOMO (Fear Of Missing Out). If our friend made money buying a meme stock, we want to do that too. Lastly, people tend to overestimate their chances. There is an old saying on wall street – do not confuse brains with a bull market. When everything is going up in price, we think we are geniuses and want to gamble more.


How we invest


As children, we trade cards/comic books etc. Or we ask our parents to buy us a lottery ticket hoping to become an instant millionaire! So we learn about gambling before we learn about investing. The trouble comes in when we continue these habits after we group up. Recently, many people have started gambling in IPO stocks, FOMO or BAAP (Buy At Any Price) stocks, cryptocurrencies, NFTs, etc. The press is filled with stories of people who made millions on cryptos. But for all these success stories, there are countless stories of people who also lost a lot of money. This is not to say that one should not gamble. It is fine to gamble with a tiny portion of your money – you will learn something new, you may have fun, and you might also make money! But betting a lot of money or your life’s savings in gambling is not a great idea.


Gambling has brought our family together. We had to move to a smaller house!

Tommy Cooper (Comedian)


Back to the dinner party


After explaining all this, I asked, “So, is Paytm an investment or gamble for you?” “It is a gamble. I have only put in a few thousand rupees”, replied the host. “Well, then you should not sell. While gambling, you expect to lose some or all of your money. People go to the casino to have fun!” “Yes, but being down 40% does not seem like fun.” “Yes, that sucks! But then, on the positive side, you gambled with the money you could afford to lose.” “I guess so. Well, at least it’s a great dinner story – so that is worth something, right?” “Absolutely! Not just that, I will write my next blog post on this!” And with that, I proceeded to finish my slice of pizza…

 

About the Author

  • Mr. FINER (Financially Independent Not Early Retired) - Find me on Twitter

  • Salaried employee who achieved Financial Independence (FI) by frugality, sound investing… and most of all, patience.

 



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