Gamblers Anonymous

Why did I say in the title that you already are a blackjack professional gambler? Think about it. If you can differentiate a blackjack professional gambler and player, then do not continue to read on. You have understood my intentions. Let me tell you a recent real life scenario…

I was hanging out with the guys at Chijmes, at a pub watching World Cup 2010 on a public overhead projector big screen. We drank, ate, cheered and bet on who will win that sort of thing.

Now, my friend spoke of another friend of his who called him up one night when he was asleep and asked for his advice on how many goals will be scored for the match of North Korea and Ivory Coast match. Since my friend was still half asleep, he carelessly said 3 goals and hung up the phone. Later the next evening, his friend called up to him and exclaimed that he had won $6,000 from that match! Was my friend a prophet? A magician? No! He was but a lazy pig uttering nonsense in his sleep and the common sense that several matches in a cup game set will hit 3 goals just crossed his mind!

But the issue that I wanted to point out is this-

I asked my friend whether did he later lose all again to betting other matches and he said that he did lose them all.

Now, this is exactly the difference between a professional gambler and a player. Why did I said that you are already a professional gambler?

That is because for a gambler, all you need to know are the rules to playing the bets! But for the player, it takes a lot of discipline, responsibility of oneself and strategies and planning in order to be successful in any game that he played.

What happens to that friend of his was this-

He did not have any strategies or discipline in controlling his money and also not understanding the football betting strategies.

Because of this, he dumped his winnings to other matches and hope for the best as he did in his winnings from the $6000 match bet. And of course as he did not understand anything, he let his emotions of winning that match take him to a “shopping spree” of making huge bets in the other matches!

For a professional blackjack player, it works the other way by understanding what planning needs to be carried out before he heads into the casino and how much to play and what strategies to use.

Furthermore, a professional player will train a lot and enforce much self-discipline into himself and when he is at the casino, he will look around and spot a good table before starting to play bets.

So if you keep guessing which team will win and which will lose, the end result is that you will eventually lose and not the teams playing the World Cup! There must be certain logic and strategies and most importantly, a good money management discipline in oneself before putting your bets!

What exactly is an Investor, a Speculator or a Gambler in the
context of the Stock Exchange Market or for that matter, any markets?

The Public as well as the Media have often loosely and interchangeably
used these three terms. Comparisons are often made between their activities,
but the terms are never explicitly defined.

You might ask if there is a need to be distinct on these terms.
Well, there is definitely such a need simply because, if you want to profit
from the market consistently, it is crucial to first, know who you are and how
you are going to participate in the market. In fact, the mindset and methods
employed by an investor, speculator or gambler differs extensively and greatly
affect the profitability of participating in the market. How perilous it is
to venture into the markets blindly!

The Public often called themselves Investors, perhaps, influenced
by the Media. But how many of them are really Investors or even Speculators.
Think about it, many of the self- acclaim Investors are actually habitual Gamblers,
betting on the market on the slightest rumours, insider news, company news or
fluctuations, hoping to get rich quick by chance. This is not a debate on whether
gambling is good or bad, but if you’re going to gamble; don’t you think you
have a better chance at the Casino, which is there for this purpose?

So, what are the differences between an Investor, Speculator and
Gambler? In order to differentiate between them, we should start by defining
them. If you’re sufficiently motivated, I encourage you to try to define the
terms ‘speculating’, ‘gambling’ and ‘investing’ before you continue reading
this article… you may surprise yourself.

Consider the following.

Investor

An investor is an individual whose primary concerns in the purchase
of a security are regular dividend income, safety of the original investment,
and if possible, capital appreciation.

A person whose principal concern in the purchase of a security
is the minimizing of risk, compared to the speculator who is prepared to accept
calculated risk in the hope of making better-than-average profits, or the “gambler”
who is prepared to take even greater risks.

In 1934, Graham and David Dodd addressed the issue and offered
a definition of “investment” in their classic text book Security Analysis

“An investment operation is one which, upon thorough analysis
promises safety of principal and an adequate return.

Operations not meeting these requirements are speculative.”

– Graham and Dodd’s Security Analysis (original 1934 edition)

Speculator

Speculation is the buying, holding, and selling of stocks, commodities, futures,
currencies, collectibles, real estate, or any valuable thing to profit from
fluctuations in its price as opposed to buying it for use or for income – dividends,
rent etc.

A speculator is one who is prepared to accept calculated risks in the marketplace
for attractive potential returns.

Speculation: The activity of forecasting the psychology of the market.

Speculative motive: The object of securing profit from knowing better
than the market what the future will bring forth.

John Maynard Keynes in The General Theory of Employment, Interest, and Money

Gambler

Gambling (or betting) is any behaviour involving the risk of money or valuables
on the outcome of a game, contest, or other event in which the outcome of that
activity is partially or totally dependent upon chance or on one’s ability to
do something.

“A gamble is the assumption of risk for no purpose but enjoyment of the
risk itself, whereas speculation is undertaken in spite of the risk involved
because one perceives a favorable risk-return trade-off. To turn a gamble into
a speculative prospect requires an adequate risk premium for compensation to
risk-averse investors for the risks that they bear.”

– Investments by Zvi Bodie, Alex Kane, and Alan J. Marcus

Regardless of how you define the terms, it is likely to be a worthwhile activity
to estimate your expected returns on both an absolute basis as well as relative
to an appropriate benchmark. And if you find yourself enjoying the activity
of investing or if you find yourself addicted to the speed and excitement of
the trading game, perhaps you should seriously consider whether you’ve crossed
the line between investing and speculation, or worse yet, maybe you are really
gambling with your money.

A lot of people’s first reaction to this question will be “what’s the difference?” It’s a fair question. Both involve putting money on some metaphorical or literal “table”, awaiting an uncertain outcome completely beyond one’s control, and taking back either more or less money than initially placed at risk. Some might counter that with investing the money is put to productive use and that in gambling it is simply put at risk using some randomizing mechanism (cards, a wheel, dice), but I really don’t think that’s the most important distinction to the risk taker as both instances involve equally uncertain outcomes regardless of the mechanism.

To a would be investor there is a very important distinction to be made because you absolutely can use the stock market or other investment vehicles exactly like a gambler uses a casino. This runs you into the hard reality that like anyone that gambles against a casino long enough, if you do this you will lose money over time. Not probably, but with the near certainty of a statistical law. It is also easy to accidentally go from being an investor to being a gambler if you are not conscious of the difference, and this is something every investor needs to guard against, especially when first learning finance.

I believe the difference comes down to expected return. If you have a negative expected return, you’re gambling. If you have a known positive expected return, you will make money, the odds are in your favor, with enough trials (time) you can predict your profits with reasonable accuracy and precision, and you are investing. Investing can reliably be part of a plan for achieving goals like how to retire, gambling cannot.

The expected return of an investment or a bet is the risk adjusted return. So for example, if you bet $1 on the flip of a coin and you will lose your dollar if you get it wrong (50%) or win a dollar if you get it right (50%) your expected return is zero or (.5*($1))+(.5*(-$1)). If you make this bet a few times, you may come out ahead or lose. If you make this bet 1000 times it is staggeringly likely that you will be very very close to even when all is said and done.

Now change the above scenario slightly. Say you have a magic coin that has a 10% chance of landing on it’s side, and when this happens you lose. Now you have an expected return per flip of -10 cents. Again, if you make this bet a few times, you may come out ahead or lose. If you make this bet 1000 times it is staggeringly likely that you will be very very close to having lost a total of $10.

Every single bet in a Casino where you bet against the house (a game like Poker which is against other players and has an element of skill can have a positive expected return, which is why some people can consistently make money at it) has a negative expected return. If you put money down with a negative expected return, by my definition I’d say you are gambling not investing. This is also why casino are NOT gambling when they allow you to play against them.

Like a casino, some investing behaviors have a negative expected return. Over time “playing” futures, options, shorting the market and frequent stock trading all have negative expected returns. This is due to bid/ask spreads, expenses and fees and tax implications, the same things that cause actively traded mutual funds to typically under-perform the market. For a more detailed discussion of this reality there is an excellent book by Burton Malkiel called A Random Walk Down Wall Street that is an essential read for anyone interested in investing vs. gambling.

The problem is that the return on investments with a positive expected return tends to be modest. For example the real return on the stock market overall after inflation and over long periods of time has run in the 4% to 5% per year range (compounded and with much higher volatility in the short term) before taxes pretty much since the start of it. The investor that becomes a gambler usually does so trying to exceed these return rates substantially by capitalizing on short term volatility… looking to multiply their money quickly rather than grow it consistently over time. And often they do! At least for a while.

There is also a completely indefensible assumption in our society that brains and savvy can overcome the odds and that people* can be investing geniuses, lending a prestige and ego boost to the successful “stock market gambler” that the craps winner lacks.

So what does this tell us? If you select a diversified portfolio (equities, bonds and real estate and a diverse mix of each balanced to achieve the degree of volatility you can tolerate and the corresponding expected returns) of investments in such a manner as to minimize expenses and hold it over time looking for real returns (after inflation) in the 3% to 4% per year range, you are probably investing and are likely to achieve your goals. If you think you can dramatically improve on these results by trading more frequently or engaging in more exotic strategies (much like a gambler with “a system”), you have probably and perhaps inadvertently becomes a gambler and gamblers are almost certain to lose if they play long enough.

*These geniuses perhaps do exist. They have PHds in Math and Physics, access to extremely powerful computers and they excel at writing sophisticated programs on these computers to execute trades automatically, work in buildings directly adjacent to major exchanges and pay to have their transactions executed faster than yours or mine. They also have privileged access to people with in depth expertise in various pertinent industries and specific companies. If this describes you, please disregard everything I wrote.

Do you know the difference between a gambler and a speculator? It’s actually a thin line of difference. One who is known to take a gamble on sports, horse racing, visiting casinos is branded as a gambler. The other type of people one who do some analysis and know what they are doing on forex trading, stocks, property etc is known to be a speculator. Today I brought this topic up is of course not to test your intelligence, but to alert our forex traders that you are pure speculators and not gamblers!

Often people will mix up gambling with forex trading, true that they may seem like friends, but definitely not the same family. However, they have some similarities, both have the possibility of losing more money and winning more money. They also have uncertainties over the future. The difference here is that gambling does not have a set of data to analyze and you can’t increase your chance of winning, it’s pure luck. For forex trading, you will need to analyze the past history using forex indicators etc, though it does not confirm a sure win. But it will definitely increase the chance of success. I know of many successful forex traders who make a living out of it (I’m one of them), but have you heard of gamblers making a living? I only know that they have to owe a lot of debts in their lives.

Some of the beginners who has just starting to learn forex think that they can make quick and easy profits from the forex market. This is totally not true and forex trading is not gambling. Firstly you must have the right mindset if you decide to embark on the currency trading journey, treating this as your own legal business. Secondly, your trading decisions must not be gut feelings, you do not think or feel whether the price will up or down. Thirdly, you must only be dependent on your forex strategy and forex trading systems, and not luck!

Make use of all the resources you need to become a successful trader, there is no easy way out and you must learn it through experience. I can give you all the forex tips and strategies you want, but you will really need to get tough with the forex market to learn valuable stuffs. But no worries at all, I will be here to give you all the help that you need in this business.