What is the difference between investing and gambling? No, this isn’t from a Dave Ramsey show or anything like that. If no one gets it by Sunday evening, I’ll post the answer.
You can deduct your investment losses.
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Gambling is what someone else did to make more money than you with their investments, especially if they’re bragging about it.
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Gambling has fixed odds. For eg, card games, or any slot/machine game at a casino.
Investing has no fixed odds.
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Haha, I’ll take a stab. There is no difference.
For real though, for gambling there are no loss mitigation strategies, you either win or lose. Investors have a variety of options to mitigate losses of their risked capital.
There is no standard answer (even with Google): To me, investing is all-inclusive, which encompasses stocks, fixed income, bonds, and gambling. Some investments are with educated analysis and rational projections, some are purely random, testing one’s luck. It is always a risk vs. benefits trade-offs.
There are two types of activities relevant to this discussion. One is an investment. The other is a speculation, which is what I believe the OP is referred to as “gambling.” It’s easiest to explain with examples:
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Scenario 1: Joe buys 1,000 shares of Apple stock because zhe believes Apple will beat forecasted earnings. Joe is speculating.
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Scenario 2: Molly buys 1,000 units of an SP500 mutual fund. Molly is investing because she’s not speculating that any individual company will go up. She’s using economic principles to understand that the economy as a whole is likely to grow over long periods of time and an index fund will reflect this growth.
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Scenario 3: Billy sells everything (bonds, cash, etc) in his 401k and puts everything into an SP500 mutual fund. Billy is not investing, he is speculating that the stock market will beat every other asset.
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Scenario 4: Harry buys a fixed portion of index stock funds and bonds each month as part of his 401k contribution. He is investing because he doesn’t know what the future will hold and understands rebalancing a diversified portfolio will reduce overall volatility.
One aspect of these factors is that investments tend not to become zero sum games. In black jack, in order for you to win, the casino has to lose an equal amount of money. In the stock market, a stock can expand and grow the underlying business and the stockholder doesn’t require a loser for him to win.
That said, not all non-zero sum games become non-gambling, because putting all your money in Apple Stock would be highly speculative and risky, even though it’s possible to make money via non-zero sum means.
Thus, we might agree there’s three types of activities: Investing, Speculating, and Gambling.
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The difference is in the eye of the beholder.
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You can deduct gambling losses too if you itemize, but only to the extent of your winnings. But how many people actually report their gambling winnings as taxable income?
Gambling is when you willingly accept a negative edge for nonfinancial benefits, like entertainment or distraction.
TripleB has the core of it: Gambling is based on pure chance and is zero-sum or negative-sum. Investing is based on economic theory and is (usually) positive-sum.
Although the hedge funds, by large, can’t beat the S&P500.
For me, investing is something I can have personal control over and 100% knowledge with respect to. E.g. investing in my business or tangible, non-speculative investments… real estate… etc.
I have seen too much corporate fraud and incompetence that has been concealed from the public (from Enron, to Yahoo, to Equifax… to Tesla lying to shareholders about the Model 3 disaster) that I would never invest in an individual stock. Look at Netflix… they were flying high a few years ago and then all of a sudden their CEO Reed Hastings just ups and decides to announce to the world that they were dumping the DVD business… and the stock price cratered immediately. How can you prepare for that? How can you prepare for possible state actors engaging in cyberterrorism against a company like Yahoo or Equifax with the purpose of shorting the stock through intermediaries?
The obverse is true for “gambling,” which is a term with several meanings. The first connotation is that it is losers throwing money away based on bad odds. However, some people gamble professionally (not the loser poker players on tv), but who are PhD’s in mathematics and have network servers running complex algorithms to bet on dummies in fantasy football or who play multiple hands at the same time with computer aids on online poker sites… even the Las Vegas shooter who made millions playing video poker based on his own algorithms in his head along with his own natural mathematical acuity. Of course things didn’t go well for him once the casinos started cracking down on the loose machines where he would bet $100k/hr., but you get the idea.
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Gambling = Long term odds will bankrupt you
Investing = Long term odds will make you wealthy.
This riddle really bogles the mind.
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It hinges on edge and intent rather than the vehicle.
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Except his examples aren’t perfect. Buying single stocks can still be investing (although arguably not the most efficient).
The main differences I’d see are two, both somewhat pointed out. Gambling (entertainment) has fixed odds with a house edge.
Speculation often is zero sum or worse (buying gold /bitcoin/currency trading/real estate, etc). When you “win” the other party losses the same amount. Or both parties slowly lose and only the third party facilitating the transaction “wins”.
Investing in companies based on forecast future growth and profits is different than the speculation because the companies (intend to) produce value over time. Your house (real estate) will not expand itself by 100sqft every year by itself under any circumstances, nor will a 1oz gold coin increase its weight every year. But a company may grow 10% (or more) for many years in a row or it may stay roughly the same size while distributing profits to its shareholders over time. A rental property also may generate income, although it requires management, so I’d argue self-managed rentals are more of a job (selling/using time) than an investment.
1 and 3 aren’t “not investing” just because they’re not overly diversified and packaged into as abstract of financial instruments.
“even the Las Vegas shooter who made millions playing video poker based on his own algorithms in his head along with his own natural mathematical acuity.”
Was he really playing on positive EV machines? And making millions?
I don’t want to give it away, but the answer can be expressed in a mathematical formula.
You totally gave it away
If I’m winning it’s investing, if I’m losing it’s gambling.
Nope.
That’s what the New York Times reported that his tax returns indicated in terms of reported gambling income. They even interviewed people that played with him during video poker tournaments, playing $100k/hr.