Two Big Ways in Which Investing and Gambling Overlap
This week calls for a bit of celebration. Seeing as my wife and I are now both fully vaccinated, we decided to travel to Las Vegas and meet up with a couple of friends. In addition to resort hopping and gathering material for future Travel Tuesday reviews, I’ve also taken to playing a bit as the mood strikes me.
At the same time that I’ve been hitting up the Strip, the stock market and other investments such as cryptocurrencies have had a bit of an interesting week. This got me thinking about some of the ways the gambling and investing are actually alike — as well as how they’re quite different. Here are a couple of examples that came to mind:
Don’t Invest or Gamble More Than You Can Afford to Lose
You had to see this one coming, right? It’s easily one of the most important rules of investing and gambling — and for good reason. I always advise that, before you pour money into a slot machine or into a stock, you should be prepared for that money to burst into flames. Otherwise, you could end up putting money at risk that you can’t actually afford to lose, which is really just tempting fate.
Being realistic, the odds of losing everything by investing in an S&P 500 ETF versus the odds of going belly up at the Craps tables are massively different. Therefore, there’s really wiggle room to that first rule (such as I wouldn’t advise workers not to invest in their 401(k)s just because they can’t really afford to lose those funds). Still, as a general principle, I think it applies.
Keeping Your Emotions in Check
To paraphrase the Most Interesting Man in the World (he’s still relevant, right?), “I don’t always gamble, but when I do, I prefer Blackjack.” As many amateur Blackjack players likely know, to give yourself the best chance at succeeding at the game, you should adhere to the rules of Basic Strategy — often humorously referred to as “BS.” By playing perfect BS and selecting tables that play by the most advantageous rules, players can limit the house edge to fractions of a percent. However, not only does it take a lot of practice to memorize the basic strategy table but following its teachings in theory can also be a lot easier than doing so in practice. For example, hitting on 16 can be scary given the likelihood of a bust and doubling down when you’re supposed to can be complicated if you’re watching your chips stack dwindle. Yet, while these plays certainly won’t work out 100% of the time, they are what’s right in the long run.
This is quite similar to investing, where emotions can often lead consumers to make mistakes. An obvious example involves market dips and even crashes. As is often said, the only way to lock-in market losses is to sell. Thus, it’s typically advised that long-term investors “stay the course” and resist the urge to panic sell.
Of course, something to note here is that “staying the course” means two very different things depending on whether you’re talking the stock market or the Blackjack table. For long term investors, it may be best to shrug off losses and wait for a return. However, to some, that might equate to chasing your losses in gambling, which can be dangerous. Instead, the course that you’re staying is playing to your basic strategy, not assuming that you’re bound to win if you just keep playing.
The line between investing and gambling can often be blurred, with one only needing to look at the rise in stocks such as GameStop and AMC for evidence of that. But, the truth is, the two activities may have even a bit more in common than some financial experts may be willing to admit. Ultimately, regardless of whether you’re investing, speculating, or just straight up gambling, knowing your risk tolerance and adhering to it is what’s most important. Good luck!