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When Gambling and Investing cross over

There are a lot of people who invest, who will tell you that investing is nothing like gambling, that gambling has everything to do with luck only and investing is all about reading the markets and making decisions off data, or it’s investing in an a fund that does guarantee a return over time, something gambling can never do.

Although this is true, it is only to an extent. There is an occasion when investing becomes gambling and any so-called guarantees that an individual was hanging their investments on, goes out of the window.

To understand this let me explain the premise of gambling. Gambling is all about betting on one thing happening over another. Whether it’s betting on black over red, one horse over all the others, The Yankees over the Red Sox, or even your stock going up and others going down, gambling is about betting on something specific happening. Take a coin toss for example. You toss a coin and you call tails, but it comes up heads, so you call it again, and again it comes up heads. The odds of it coming up heads a third time are now even greater, so therefore, the chance it will land on tails has increased and so you now bet $10 on the coin landing tails. Having placed your bet, you toss the coin and it lands on heads again. OK, the next toss has to land on tails, so you double your stake, toss the coin and it comes up heads a fourth time. You go through this process ten times, each time doubling your stake and each time losing. That original $10 bet is now a $20,000 plus loss.

This is where gambling and investing cross over. A leading investment expert goes on MNBC or Bloomberg and says that the market is going to go down. Right now there is a lot of chatter that we are potentially moving towards a bear market, but on what basis is that statement made? It is purely made on the direction the market took last month. As a result of the statement made, people then adjust their investments to be in line with a bear market, but making statements purely because the previous month was down, is no different from saying the coin has to land on tails this time because the last 6 were all heads.

History cannot tell us how something is going to turn out, it only tells us what happened. So just because you had a certain number of months of negative results, doesn’t mean that it is going to continue for another three or four months, but neither can you say that because we have had 3 months of negative results we are bound to have good ones now because the same thing happened in ‘1990 whenever.’

Investing is about reading the here and now, not hoping that it will turn or that history will repeat its self. Having that mindset leads to being overly confident – a ‘one day it’s going to turn it has to’ attitude, and all the time you are increasing your investment with the view, your luck has to change soon and you will recoup those losses.

Unfortunately, that is not how it works and like many gamblers who walk away from the table full of regret and remorse, so do investors if they allow investing to cross over into gambling.

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