Tan Kin Lian's Blog: Gambling and investing

Wednesday, October 21, 2009

Gambling and investing

Gambling is a game of chance. You bet a sum of money on a future outcome. You hope that it happens and you win the bet. If it does not happen, you lose the bet.

You can gamble on a game of roulette that has the number 1 to 36. You choose a number and place a bet. If the number appears on the next role, you win a price of 35 times of your bet. If it does not appear, you lose your bet.

You can also gamble on a 4 digit number or the numbers that will appear in Toto. You can also gamble on the Big Sweep and hope that win a large prize if your ticket number is drawn.

When you "invest" in a stock or foreign currency, you are also gambling that the price of the stock or currency will go up and give you a profit. If it goes down and you are not able to hold the position (e.g. if you are on borrowed money), you will have to sell the stock or currency and take a loss. You are actually gambling (or speculating - to use a nice word) on the price of the stock or share.

If you choose a good stock and is prepared to keep it for a long time to earn a share of the future profits, and you do not bother about the price of the stock, you can be considered as "investing" in the stock.

When you gamble, and this includes speculating in financial products, you have to make sure that you are getting a fair payout for your risk of loss. If you have a 1 in 6 chance of winning (and 5 in 6 chance of losing) in a game of dice, you should get a payout of 5 times for winning.

You should avoid structured products where the chance of winning is not transparent to you. You are likely to be given a lower payout than is justified by the risk that you are taking.

I shall write more about calculating the odds (or chance of winning) in a later article.

Tan Kin Lian

5 comments:

Anonymous said...: HSBC newly launched gauranteed 5 year single premium endowment.
Return of 1.8% for amount less than $98000 and 2.00% above $98K.

Is it gambling or investing?
NEITHER!!!!!!
It is a sure loss or guanrateed loss. It is a 'eat finished wait to die' sitting duck.; October 21, 2009 10:14 AM
Anonymous said...: Capital Plus also same same .only 1.4% for 2 years..
accumulate wealth????? accumulate shit!!; October 21, 2009 1:27 PM
Vincent Sear said...: There's also difference between gambling and punting. Gambling includes card games, dice games, machine games etc. where the odds are set and the outcomes completely random. The one with the most time and money wins in the long run, i.e. the banker.

However, gambling is also not all about chance and luck only. In many games, experience, mathematical understanding of the odds, memory of dealt cards etc. improve the player's chance.

Punting includes most sports betting like horse racing and football. The odds are adjusted according to the likelihoods of the outcomes as there's many different strengths and weaknesses of the participants involved. Punters don't play in the games, they bet on the results of the games according to their readings of the forms and odds.

The line between speculation and investment is less clearly defined as both for modes and motives, most of the vehicles are same, but there's still difference. Generally, those who trade frequently over short terms for quick gains are considered speculators, and those who hold over long terms for capital growth are considered investors.

Stocks and unit trusts are more like punting then gambling as the investors and speculators can find out all the strengths and weaknesses and potentials of the vehicles before deciding upon which to stake their money. It's not random toss of coin or deal of cards (but some do treat it that way, at their own risk of course).; October 21, 2009 2:27 PM
Anonymous said...: There is a difference between a calculated bet and a bet that is pure gambling (i.e. 100% "heng-suay" type). A calculated bet doesn't guarantee success, but you would have done all you can to eliminate risks as best as you can. On the other hand, a pure gamble is one where you place your money and just hope and pray.

I think the way to see it is to consider probability, as what you are trying to show here. If you're a smart investor, you consider the probabilities and try to anticipate unsystematic risks as best as you can-- if you're a punter, then you just choose a stock you like, and just dump money in...and let hope do the rest.; October 21, 2009 3:12 PM
Anonymous said...: Insurance agents encourage their clients to gamble on the ILPs becuase they make more money this way. Before the clamp down churning was so rampant. It is still today but disguised sometime like profit taking.; October 21, 2009 8:12 PM