Are you an Investor or a Gambler?

One look at the dictionary will tell you that investing and gambling are, at their core, startlingly different. But there are still plenty of so-called investors who behave far more like gamblers, especially when it comes to the expectation of profit with the associated risk. Let me tell you a story about my younger self. A story, telling you how I got a sneak peek into the world of gambling.

It was my first trip to Macau. That night, I dressed well. White Armani Shirt, blue jeans and a sleek hairstyle. I entered the casino and could feel the vibe. It felt like one big party. I was amazed by the atmosphere and the sound of slot machines. Drinks were flowing, food was on the house, and all you had to do was play. Most tables had minimum bet sizes more than I could afford. I headed to the Blackjack table (that’s the only game I knew back then). It’s quite simple. It’s you versus the dealer. Whoever gets closest to 21 wins. But if you go above 21, you go bust. I decided I could lose maximum up to a $1000 and wouldn’t cross that. It was 11 P.M., and I was excited to play. After a number of games, I was up $2000. The feeling was unbelievable. I had thought of all the things I could do with that money. At one point I thought God would come down and ask me “Hey, What time should I get the sun out tomorrow morning” and I would pause for a minute and reply, “Maybe 7.30 is fine.” But here’s the thing: The moment you think you have it all figured out, that’s it! That’s the peak. By 5 am, I had lost everything and more. I was down $1500. That was my last trip, though. Never entered the casino again.

Most of us do not even know whether we are gamblers or investors. It’s important to understand the difference between the two and characterize who we are. If we cannot characterize who we are, we will lose.

Investing and gambling both require taking risks and making a choice. The choice of how much to bet/invest and the level of risk we are willing to accept. But the major difference is what you are betting on and the mindset with which you do the same. The stakes in investing may be as high as gambling when one knows what they’re investing in it.

So what is the difference?

In his book “What I learned after losing a million dollars,” Jim Paul writes: “Investing is parting with capital with the expectation of safety of principal and an adequate return on the capital in the form of dividends, interest or rent. Since the return on capital takes the form of periodic payments of interest or dividends, investing indicates an intention to be separated from the capital for an extended period of time.

Therefore, investing is usually associated with relatively long-time horizons. And Gambling or betting “is an agreement between two parties where the party proved wrong about the outcome of a certain event will forfeit a stipulated amount to the other party. More often they bet on whom they want to win rather than who will win. Gambling usually involves a game or an event of chance. It is a form of entertainment. Gamblers may make money, but they are not deprived of enjoyment or entertainment if they do not make money.”

A real investor is a person who stays true to his process. He may be tested when his portfolio is down, but his reaction to it, that’s what makes the difference. For instance, people thought that Warren Buffett had lost his touch during the dot-com bubble, where Berkshire was down a whopping 44% while Nasdaq is up 145%. But it was the aftermath of the bubble that showed everyone he was here to stay with Nasdaq down more than 78% and Berkshire up more than 40%. He focused on the game, had faith in his process and he emerged victoriously. This is precisely what defines a real investor.

Here are the best part and something worth understanding: “Do not make the mistake of assuming that just because you are participating in the market you are automatically an investor. The markets do not make you immune from betting or gambling. Investing or gambling is not defined by any particular activity itself but by how one approaches the activity.”

The bettor is interested in being right. His ego is on the line. His immediate aim is entertainment, not investing. Most individuals “invest” with a target of entertainment. For the thrill of seeing their stocks rising. They do so to escape the humdrum of everyday life. It fulfills the desire for stimulus replacing the painful boredom of everyday life with the thrill and excitement. Money is the only entry barrier for both investing and gambling. But winning doesn’t matter as much in gambling as much entertainment and excitement do. Winning is only needed so that one can continue the excitement. Real investing, should be boring, not exciting.

When it comes to gambling the house always has an edge – there is a negative expected return to gamblers. On the other hand, investing in the stock market typically carries with it a positive expected return, on average over the long run (if you would have passively invested in Nifty). This doesn’t mean that a gambler will never hit the jackpot – and it also doesn’t mean that a stock investor will always enjoy a positive return. Investors often lose too. Not every person makes a profit on every trade. Stocks can go wrong, trades may not go your way but it’s important to believe in your investment idea and follow it to the T.

It’s important to characterize who you are. Are you a Gambler or are you an Investor? Are you in the markets for entertainment or is it your business to invest? Are you in it for the excitement or for the profits? Are you trying to validate your ego with every trade you place or are you immune to the daily market movements? Ask yourself these questions, and you will know where you stand.