Gambling vs Investing

For the next series of posts, I am going to share thoughts from my investment journey. I recalled slightly more than a year ago, a friend told me he is investing in the share market and my immediate reaction is "No thanks, I am not a gambler".

As such, this post begins by trying to differentiate gambling and investing.

http://www.investorguide.com/gambling-vs-investing provides a in-depth discussion on this topic which is worth a read. I have taken a few key points from the article and listed them below.

According to dictionary.com website,
"Gamble: To bet on an uncertain outcome, as of a contest. To take a risk in the hope of gaining an advantage or a benefit."
"Invest: To commit money or capital in order to gain a financial return."

In Wikipedia, "the stakes" is being referred to in gambling and the time frame is short. In contrast, Wikipedia used the word "commitment" to refer to the initial cash outlay in Investing.

Now here's my take on it now (a year later).

What they have in common?
- Both involves money;
- Both has possibility that one of outcome is receiving more money; and
- Both contains risks

So what's the different?
Time horizon: Gambling has a shorter time frame than Investing.
Effort and homework: Investing demands more analysis and thought behind the investment choices compared to Gambling.
Intention: Gambling is a risk-taking activity that you enjoy the thrill of winning. Investing is a risk-adverse activity which you want to "protect" your money (capital).
Outcome: In Gambling, it doesn't matter if you loose your money as it tends to be associated with entertainment. In Investing, if you loose your money, it matters more. This a very interesting point since it is easier to walk away from gambling, but for investing, the fear of losing money and therefore wanting to recouped your losses may change your behaviour to become a risk taker (i.e. you are no longer rational).

Because of the perception that gambling is a bad thing, some people (like me a year ago) shy away from buying shares in the stock market since the concept of taking risk, when associated with gambling, is bad. That said, why would anyone invest significant amount of their retirement funds in the very financial product they won't buy themselves.

It is not the physical act of buying/selling shares, but the process an individual go through that differentiate Gambling and Investing.

If you have done all the analysis and research with a long term view, and have no intention to make a quick buck. Not executing the trade just because you think it is gambling is an irrational thing to do.

The next challenge I faced is how do I know my research that supports my investment decision is "right".