Myth 6: Trading is Gambling

It is a common misconception to equate stock market investing with gambling, even though there are risks involved in both scenarios.

Gambling

Note that most people approach gambling with entertainment and excitement in mind. It is very rare for a successful businessman to make a business from gambling on the floor alone, as luck and chance are not a good way to build wealth and equity. The system operations of the gambling world prevents such things from happening. This affects the masses of people who expect to cash in big out of the casinos.

An investigation into the gambling world would reveal that the games are designed to be stacked in the house’s favor. Hence in the long run, profit expectations for the house is positive. This means that casinos are a profitable business (consider Las Vegas Casino’s) because their long run profits are guaranteed. How this works is that the masses of other players that the house beats in the long run, provides greater revenue than the cost of a single player winning against the house in the short run. This is just the way the statistics work.

In fact, increasing knowledge and research on gambling would reveal the skewed statistics. There are very little ways to “beat the odds”, simply because the “odds” are designed to be against the player. This is noted by The University of Nevada, Las Vegas Center for Gaming Research, who discovered that the “house edge” or the house advantage, a measure of long run wager expectation in favor of the casino is in the majority, positive. For example, a +5% house edge translates to an average player loss of $5 for every $100 the player wagers into the game. This means that a player loss is designed to be near guaranteed in the long run. Shown below is a summary table for several popular casino/betting games for your reference (extracted from http://gaming.unlv.edu/casinomath.html):

GameHouse Edge (%)GameHouse Edge (%)
Roulette 2.7 – 7.893-Card Poker2.33 – 3.37
Craps 0.12 – 16.67Big Six Wheel19.84
Blackjack-1.0 – 4.0Baccarat1.06 – 1.24
Slots5.0 – 10.0Sports Betting4.55
Keno27.0Caribbean Stud5.22
Video Poker0.5 – 3.0Pai Gow Poker~2.5

These are average figures. A more specific figure can be obtained by going to the casino in question and ask about their house edge information. In Australia, it is mandated by the government that each casino would make their house edge accessible to public.

To conclude, for one to reap a return out of gambling, he relies on luck and chance to beat the house consistently. This is not a good path to build wealth.

Investing

Investing is not the same as gambling. It is seen as gambling because most people approach it that way; picking random stocks, buying bunches of shares, waiting a week or a certain time period, and then selling it. That is gambling, and its wrong to see investing in that manner. A good investment does not rely on luck and chance to win a return.

Unfortunately, real investing is not like what the movies generally portrays, where a nicely-suited man deposits a small cash bundle and return a certain time period later with suitcases full of cash. The correct way to approach investing is to treat it like studying; need lots of research, and its returns are non-instant. Knowledge is the ultimate helper for an investor; the more knowledge an investor have about investment, the lower their risks. Unlike gambling, there are no deceptive systems that would prevent somebody to be successful and making a return in the investment world. As long as an investor knows how the market works, what is currently going on, and are constantly learning and equipped with the skills he needs, he can make a profit out of the trade. However, it takes patience, work, and mental fortitude to reach this stage, unlike gambling.

A look into investment research, reveals that the odds against up us when we invest are tremendously low. In terms of statistics, NerdWallet’s research uncovered the investment risks in the stock market over a 40 year period (https://www.nerdwallet.com/blog/investing/avoiding-the-stock-market-may-cost-millennials-3-3-million/). The research took over 40 years of data from:

  • S&P500 market returns
  • 3-monthly Treasury Bill market returns
  • Monte Carlo simulation

All of the statistics shown examines investments with a 10.96% average annual returns. And this is what they found:

  • 1% odds of NOT retaining initial investment
  • 5% odds of NOT tripling (3x) initial investment

As we can see here in this 40 year investment in the stock market, there is only a 1% chance of us not retaining our initial investment and a 5% chance of our investments not tripling.

In other words, when we translate this into terms of performance (what the investors gained when he decides to invest):

  • 99% odds of at least retaining initial investment
  • 95% odds of tripling (3x) initial investment

This shows that investing in a stock market performs significantly better than putting investments in a bank savings account (3% odds of tripling initial investment over 40-year period)

Conclusion

It is a closed case that investment is not gambling by any stretch of imagination. Investment requires effort and patience to reach a profitable level of trade, and the profits are with those who are willing to do that. This is evident from the 10% yearly returns in a 40 year investment that we can get when we start investing early.

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Disclaimer: Information provided here is purely for general educational purpose without regard to any individual objectives, financial situation or needs. We are not the investment advisors and therefore all information given should not be construed as an offer to purchase or sell securities of any kind. SFA, the instructors and its staff accept no responsibility nor assume any liability for any direct, indirect or consequential gain or loss arising from the use of the information contained here. Before making any decision about the information provided, you must consider the appropriateness of the information according to your own personal situations. Past performance of the financial products is no assurance of the future performance.

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