Firstly, it’s important to clarify what is meant by investing and gambling. According to the Cambridge Dictionary, these terms are defined as follows:

Gambling: ‘The act of risking money on the outcome of various events, such as a game or horse race, with the hope of earning a profit.’

Investing: ‘To purchase something, such as stocks or real estate, with the expectation that its value will increase to generate a profit.’

These definitions reveal a key distinction: investing is based on informed expectations of asset appreciation, while gambling is predominantly reliant on chance and aspirations.

The appeal of gambling

Gambling often brings to mind excitement and amusement. Elvis famously depicted Las Vegas as a “bright light city [that’s] gonna set my soul on fire.” Events like horse racing attract large crowds where spectators in elegant attire dream of a lucky bet that could change their fortunes overnight.

Investing: The enduring journey

On the other hand, investing is often seen as slow, strategic, and possibly a bit boring. One might picture Warren Buffett – the ideal of patience and discipline – rather than Jordan Belfort, the infamous figure from “The Wolf of Wall Street,” who represents taking high-stakes risks.

True investing aligns more with Buffett’s philosophy, where success stems from patience and long-term planning, while the excitement and unpredictability of Belfort’s approaches often resemble gambling.

When undertaken wisely, investments can indeed lead to significant wealth, but usually over a lengthy timeframe, like 20 to 30 years. In “The Snowball: Warren Buffett and the Business of Life,” an early investor thanked Buffett for their wealth, to which Buffett responded, “I didn’t make you rich; you never sold.”

This highlights that the core of successful investing is patience – wealth builds through holding onto investments rather than frequent trading.

Key distinctions between investing and gambling

There are vital differences between investing and gambling, and understanding these is crucial when making financial decisions.

Risk: Both investors and gamblers encounter risk, yet the type of risk differs. Investors engage in calculated risks intended to generate dividends, interest, or capital gains, aiming to grow assets over time. In gambling, the odds are stacked against the gambler – prolonged gambling generally leads to higher chances of loss.

In contrast, long-term investments in the stock market have historically produced positive returns. Even when investors don’t see immediate gains, their likelihood of success generally increases the longer they stay invested.

Loss: A crucial difference between gambling and investing is the ability to manage losses. In gambling, after placing a bet, there’s no control over the outcome, which could result in total loss. Meanwhile, investing allows for various strategies to reduce risk, such as diversification, where investors allocate their capital across multiple assets to limit exposure to individual risks. Although diversification does not prevent losses, it can provide some protection against market volatility.

Time: Time also plays a significant role in distinguishing investing from gambling. Gambling tends to be a short-term activity; once an event is over, the opportunity for profit disappears. Conversely, investing is a long-term endeavor. Investors can reap rewards over time, particularly through dividend-yielding companies that offer consistent returns. The longer one invests, the greater the likelihood of seeing favorable outcomes.

Addressing concerns about market volatility

Some may argue that investing in volatile markets is akin to gambling, especially when outcomes are uncertain. While market fluctuations can affect investment values, historical data shows that the chances of making a profit increase considerably over time.

For instance, historical records from the S&P 500 and the IA SBBI US Large Cap Index indicate that over a 15-year investment span, there’s a 99.8% probability of earning profits, assuming all other factors remain the same.

In Conclusion: Investing is not gambling

Although investing and gambling may share superficial similarities due to their potential for gains and losses, the fundamental difference lies in the approach and mindset involved. Gambling is steeped in hope, while investing is grounded in careful analysis and a commitment to achieving returns.

Engaging in uninformed or speculative investments resembles gambling; however, with proper research, diligence, and a clear understanding of risk and reward, investing becomes a strategic approach to wealth accumulation over time.

It is always wise to consult a certified financial planner when making investment decisions to ensure your financial strategies are informed and aligned with your goals.

Auraeus Kilian is a wealth associate at Alexforbes.

For more comprehensive finance and business news, follow Moneyweb on WhatsApp here.