Investing vs. Gambling

In this podcast, Motley Fool analyst Anand Chokkavelu and Motley Fool producer Ricky Mulvey discuss:

• The lines between gambling and investing, and when they get blurry. 
• Games that Wall Street traders play.
• Positive sum, negative sum games, and how to know the difference.
• How Uncle Sam helps investors more than gamblers.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 8, 2023.

Anand Chokkavelu: Here's the beauty of the stock market. This is why many of the people call it the greatest moneymaking engine ever and it's because if you're a mediocre or average stock market investor, you can expect about 10% a year minus fees. It's why you want low-cost index funds with no work through those index funds. You can be a crappy investor and still make positive returns.

Dylan Lewis: I'm Dylan Lewis and that's the Motley Fool's, Anand Chokkavelu. If the difference between gambling and investing is obvious to you then you're in the minority. Ricky Mulvey caught up with Chokkavelu for a Deep Dive on the differences, similarities and gray areas between gambling and investing. What small investors can win from the games that Wall Street traders play and what investors can learn from gamblers.

Ricky Mulvey: I think there's an assumption that many would say, oh, I know the difference between investing in gambling, but that distinction is not that clear and I think it's worth doing a Deep Dive into the difference between them and why it's important.

Anand Chokkavelu: Very excited for this, Ricky. Yeah, there is a lot of gray area here and we're going to explore all of it.

Ricky Mulvey: To me, I define it as gambling represents an all or nothing bet on an outcome with a defined exploration time. A slot machine, sports betting, blackjack, even Poker fits into that because you're placing an all or nothing bet that your cards are better than your competitors, even though it may be a series of bets. Whereas investing, in my opinion, it's not necessarily an all or nothing bet and there is no defined expiration date.

Anand Chokkavelu: To that I'd add that investing is putting your money into something productive or useful like a business versus just playing a game.

Ricky Mulvey: The part of this that got me thinking about the difference was this, it a 2019 survey from LendingTree and they found that 55% of Americans thought that investing was as risky as gambling. I know that was four years ago, I would wager that that generally still holds, but two key parts of the survey that I thought was interesting is that 72% of gamblers are currently investing in the market, whereas only 56% of non gamblers are currently investing and 57% of gamblers are active investors compared to 30% of non gamblers. I think the first statistic, about 72% of gamblers investing makes more sense because if you have money to invest, therefore you may have money to gamble. But the second part that's interesting to me is I think that a lot of folks who may say, I'm not a gambler are actually gambling.

Anand Chokkavelu: Absolutely. Let's remember 2019 was before meme stocks were even a thing. Those numbers are probably higher at this point.

Ricky Mulvey: Investing can feel like gambling and the lines have been blurred. One reason is that investing in stock, like you're putting your money into an imaginary place where you don't have control over the outcome and I think that's where people can say like, oh yeah, investing in the stock market is the same thing. Then through the pandemic even till today, the line between stock trading and sportsbooks got blurry. Some of that was on-purpose, some of it was not, but if you look at a company like Robinhood, I think they're offering sign-up bonuses to start trading stocks. If you're incentivize them the same way to start investing and start gambling then I can see where the lines get blurred.

Anand Chokkavelu: Yeah. There is uncertainty in everything in this world, but I really hope people don't do, and I know people do it because you hear it from people is to just equate the two and say, oh, well, there's risks and anything and use that as a reason for inaction. For not doing things like putting money in their 401(k) or investing in the stock market and instead just using it as excuse to spend more money on vacations and things like that instead of putting away for retirement and then that's really a sad outcome.

Ricky Mulvey: The other thing I don't want to do in this conversation though, it's like get into the moral argument of gambling. It's exciting and I think that many folks in the financial industry would not admit to that like with good reason. Like if you have a financial advisor and they're investing your money for retirement, like you probably don't want to hear about their trips to the casino that weekend or if they bet on the MLB that past weekend.

Anand Chokkavelu: But let's put our cards on the table, Ricky. I think we both like the sports Campbell and we both like to play poker, correct?

Ricky Mulvey: I don't play poker as much. I do miss the days of having a regular at-home poker game.

Anand Chokkavelu: We've talking about it. My dream is to have our highview parked dad's group have regular game, been floating it out there.

Ricky Mulvey: I would say I lose about $200 to $400 a year betting on sports. I've played blackjack craps, go into a marriage celebration. I'm going to go to Las Vegas later this month and I'm mainly going to be there to celebrate with my friends. I'm also aware that the golden gate casino has the lowest table minimums in town. You know what? If there's one takeaway, you can lose plenty of money at low stakes. If you're going to gamble it low stakes, you can lose so much money quickly and you'll do fine writing that check.

Anand Chokkavelu: The key is to stay focused.

Ricky Mulvey: Stay focused on losing money? How about you?

Anand Chokkavelu: For me, yeah. Similar, I love playing poker, I love home games, that thing or go into the casino. We've a couple in the DC area now that we didn't. Used to have to go all the way up to Atlantic city and then sports gambling. I do the apps and play the sign-up bonus games and things like that and my goal is to be breakeven and be playing with house money. I think I can say because they do a lot of futures bets. The long-term investing of sports gambling so I've like money on next year, Super Bowl. Things like that, division winners, things like that. The money, it's hard to tell if you're totally up or down, but I think I can safely say I'm in the vicinity of breakeven including signing bonuses and stuff.

Ricky Mulvey: Card on the table you're also a CFA, so you might have an advantage over other folks in terms of determining odds and that thing.

Anand Chokkavelu: I'm a CFA who punted on the bond math Section. I'm one of those. Let's be clear, the sports gambling it's not covered on the CFA.

Ricky Mulvey: I also I appreciate the distinction of what was it long-term investing for futures and not an interest-free loan to the sports books.

Anand Chokkavelu: That's right. Well, that's the lie you tell yourself.

Ricky Mulvey: We all need to. Let's get into the gray area. Because while there is a distinction between gambling and investing, you absolutely can gamble in the stock market.

Anand Chokkavelu: Yep. I mean, Ben Graham is the value investor, which is the hardest core investors, and he recognized that. He calls it speculating versus investing. Speculating basically meaning gambling and he's talking stocks. They're not on sports and not on casinos or anything, purely on stocks. There is gambling.

Ricky Mulvey: He smoked cigars that he found on the sidewalk. That's how hardcore he was. But I likes the rough continuum you laid out where there's essentially like in terms of, let's go from pure gambling to investing. You have flipping a coin, which would be pure gambling. Then above that you have sports gambling. Then meme stocks. After memes you have poker is a better investment than gambling.

Anand Chokkavelu: We can do a lot of argue on this. Poker, because it is a game of skill with a lot of luck involved. Here's the analogy or, here's the example I'd use. Phil Ivey, maybe widely considered the best or one of the best poker players in the world. If he and I sat in a room and one person is going to die at the end of 1,000 hours, whoever has more money is going to walk out of there. I'm dead 99.99% of the time.

Ricky Mulvey: Okay.

Anand Chokkavelu: There's at least a lot of skill.

Ricky Mulvey: Well, I hope you don't run into that situation. You have flipping a coin sports gambling, meme stocks, poker then options. That's the all or nothing bet on the outcome. Venture capital turnaround investing in stock so let's say you find a beaten down company and then you think that the new CEO is going to work something out, above that is buying a stock in a great business and then above that is buying a broad-based index fund for your pure investing. That's the continuum.

Anand Chokkavelu: Right arm and maybe you could argue right, like the poker and options, well, depending on how you're doing it, poker, I might even argue, is higher, but there's no underlying business, it's probably not investing, but there's a way to make money maybe that's a different distinction.

Ricky Mulvey: The one thing that both things have in common poker and options, is that in both of those cases, your opponent might be a sharp. When you're playing poker if you're playing the options game, there's a very good chance that someone at the table or someone on the other side of that trade knows a lot more than you.

Anand Chokkavelu: Absolutely. For stocks, what we talk about is it's almost an advantage when we talk about it as an advantage for small-term investors because Wall Street folks, they're playing against the other Wall Street folks for short-term gains and you talked about flash trading, things like that. They're all playing against each other for the trading, when you're buying just a great business over the long term. That's not days and weeks and quarters, that's decades and the Wall Street folks just aren't even playing that game. Sometimes you get a great buying opportunity because the short-term drops the stock 50% and you can get in on a great business.

Ricky Mulvey: Well, what's that? There's like when Wall Street traders are trying to boost their quarterly return. You'll sometimes see at the end of quarters, window dressing, they're chopping businesses just so they can get a better return number. Not necessarily because of anything that has to do with the businesses that they own.

Anand Chokkavelu: We're having to get rid of a company and a fund because oh, no longer fits the dictates of that fund or something enters or exits the S&P 500.

Ricky Mulvey: Yeah, I want to get into like the sober look, how people make money in sports gambling might seem like a dumb question, but there's plenty of money there. Is there any money to be made in sports betting?

Anand Chokkavelu: We all think there is. We all have our systems. We all follow different things, but I think if we keep that shark analogy, the problem is that we small fish are essentially trying to day trade against Wall Street trading houses and we're going up against math geniuses and AI developers and all trying to play the same game, but let's step back to the actual math behind some of this too. You got to get that aspect but then here's the beauty of the stock market. This is why people call it the greatest moneymaking engine ever and it's because if you're a mediocre or average stock market investor, you can expect about 10% a year minus fees.

That's why you want low-cost index funds. With no work through those index funds, you can be a crappy investor and still make positive returns. Right now a really bad investor is making 5% a year when the markets up 10% a year, you're still making money. But let's talk about the sports gambler. It is what you call a zero-sum game, you're against other gamblers or the house. Well, in sports gambling, it's against other people, 0% return minus the betting app vigs, plus some sign-up bonuses and stuff, but if you're betting a lot of money though, sign-up bonuses round to zero. If you're an excellent sports gambler, you can take 0% up to a few percent up. A great professional gambler can when people think, oh, they're probably winning 75, 80% of their bets. No, a great gambler is getting 55% of bets. Let's do the math there, 55% versus getting up that 5% after vigs versus a 10% return for a good investor, 15 per average, 15% for like a great stock market investor or 20% if you won buffet, meanwhile you're eking out those few percentages as a sports gambler, if you're great.

Ricky Mulvey: I think the Vig is the big part, and a lot of those have, I shouldn't say, been erased, but there's an illusion that they're gone, especially with the boosted bets in the promo. Lot of sports-books right now, like DraftKings and FanDuel, they'll give you a parlay and they'll say, hey, we've boosted this bet from, let's say, negative 150 odds to plus 100 and I think that that can give the illusion that, OK, oh, that edge on the casino side is gone and I don't think that that's true. I think it's more akin to like a deal at Macy's or TJ Maxx or they say, Hey, we've marked down this T-shirt from $50-$15, but you don't necessarily know if they ever sold the T-shirt for 50 bucks.

Anand Chokkavelu: Absolutely and to be clear, guilty is charged on all of it. I love profit booths. Like, oh wait, I get a 50%. I know the masters from now. There are things like that. It's exciting and it's interesting, but the house is going to win.

Ricky Mulvey: Or if you want to beat the house, it takes an intense amount of work to get to that 5%. This was back in 2015 when Daily Fantasy Sports was all the rage. Bloomberg did a great report on who is winning in those games. It's company called RotoGrinders, great name by the way. RotoGrinders found that the 100 ranked players in these Daily Fantasy Sports leagues were winning 873 times daily. The rest of the field, 20,000 people were winning just 13 times a day. That's illustrative because a lot of those people in that top 100, they were hardcore data analysts. They're spending 16 hours a day on this stuff. One of the people who's quoted in it when asked how much time do you spend on this, they said, do we count the time I watch watching sports because if so, then it's 16 hours a day. You get 8 hours to sleep and do whatever else you want. For a lot of those hard cores, it's the same thing in poker though, where the people who might be making a profit are the ones that have to essentially like, you got to commit your life to it.

Anand Chokkavelu: It's a miserable life in being a poker grinder. Movie rounders, we all think we're Matt Damon. As Mike McDermott, but the hero of that movie is John Turturro as Joey Knish. He's the one just grinding, he's like no, I'm not going to take the big risk just every day not exciting, just doing it every single day. The best poker players make their money by sitting at the table for just marathon sessions, 8 hours, 12 hours, 24 hours, day after day, month after month, and just doing nothing. Check. A few good hands a session, all to make what an office job makes. We think about the big swings, but to get those big swings it's just like, there was that guy who put his entire life savings on a roulette spin. You can do that and he's going to have a big winning if it comes out good, but if it doesn't, well, you don't hear that story.

Ricky Mulvey: I'm not trying to continue the hate train here. You actually brought this up. I'm not stealing your take, that the professional poker players you see aren't making a profit on playing professional poker because it's a negative some game. They're making money on sponsorships.

Anand Chokkavelu: Yeah and even if they are, it's not as much as, like all those sponsorships and TV shows and all of that stuff. But just because you can doesn't mean you will and you're not playing three hours in a day before dinner on a cruise or in Vegas for like two days. It's rough and by the way just as a side note, if say you do that for five years and then at the end you're like, oh, this isn't for me, you have no transferable skills.

Ricky Mulvey: I disagree. If you wanted to work in insurance adjustment maybe, you have a good idea of risk. You could write insurance policies. That's way less fun than playing poker. Then a lot of them probably have a pretty good understanding of game theory. I bet there's some consultancy jobs that would like that.

Anand Chokkavelu: To be fair. You have transferable skills, but will the employer believed them and they go, OK. Well, yeah, you got to put a little extra work in to get that insurance job. You know what, I'm like, wait, how good of a poker player were you? Why are you done? I'm going to trust your odds and your skills?

Ricky Mulvey: I'm so good at poker now I need to go get this office job, fair enough. I do think gambling has impacted the way I invest and I think it's impacted the way that you invest.

Anand Chokkavelu: Absolutely. For me, poker helps me move my patience and humility. Investing in a stock, it can take years and years before you figure out if you were right. The classic thing of, my stock is down 60%. But no, I'm in it for the long haul and I'm not wrong. We're three years in, but this is 10 more years I'll be proven right. Maybe, maybe not, but it's hard to hard to know. Then it takes a lifetime to figure out if you're a market beating investor. I would say on my deathbed, I can tell you, you know what? I think I can beat the market now, goodnight. But that's a lot of time for hubris to grow exponentially when you don't have that great feedback loop.

Whereas in a poker match, you get that feedback immediately. A few hours on a poker table gives you hundreds of data points. You can still fool yourself one way or the other and bad session, bad run of cards, all that thing. But for me, the same things is true in poker and investing, I get into trouble when I can't handle my emotions and when I'm not just slowly deliberately doing the work and having the patience to not take swings I shouldn't take. When I play too many cards on a poker table, quickly get into trouble in the mid game and then I'm losing money to a much better player and I got to get my ego back in check and it's down to earth and that helps me with bigger, you could say, bets or wagers, or positions in the stock market, where you're just like, you know what? Maybe I need to take a couple extra days and do a few more hours to research before buying that stock.

Ricky Mulvey: I think for me it's helped with loss aversion a little bit, which is both healthy and unhealthy. You understand that every stock you buy isn't going to be at 10-bagger. But also, there's the key difference which is that money lost in a sports bet will never come back. Money lost on a stock does have the possibility of coming back. While there's a one-to-one loss on a sports bet, so you can win, you've only one x amount. In stocks, it's a couple of bets that are going to drive the majority of your returns probably. Then the other thing that I think it's affected me as it's encouraged me to fish in smaller ponds. I'm not interested in doing this sports betting, but a lot of the sharps look for those really small ponds. They might not be betting on the NFL, but they might know the University of Dayton's baseball team really well and they study it and they try to find inconsistencies in those market. I think there's a similar thing for small caps where you don't have a lot of eyes on companies that are worth less than a billion dollars. You don't see a lot of Wall Street analysts taken a crack at those in a meaningful way. I like listening to the folks that really pay attention to those companies.

Anand Chokkavelu: Yeah, when you're at a poker table and everyone seems to know each other and they know the names of the dealers and they're talking to each other and they've played each other a bunch of times, you know you're in trouble, and that the opposite of that is finding a really few bad players at the table will help you out. Going into like small caps, things like that, and that research really can pay off.

Ricky Mulvey: It reminds me of understanding the game that you're playing. The very old example that I think of is the singer Marvin Gaye. Muhammad Ali was a part of this charity event, and the highlight of the charity event was that it was Sammy Davis Junior, Richard Pryor, Marvin Gaye, and then the guy who played the trainer in Rocky were all going to spar around with Muhammad Ali, and most of them agreed to do a comedy show, like a dance routine a bit, that kind of thing, except Marvin Gaye, because he was trying now boxing and he's like, I'm going to fight Muhammad Ali. We're going to have a real match and we're going to see what happens. Muhammad Ali, he encouraged him not to do that, but he did, and Marvin Gaye got beat up. He was humiliated and he left the event. There were some external things going on that we don't need to get into in the show, but for me, I try to think of that in terms of, especially in investing and sports gambling, if you're playing a game, sometimes you think you're Muhammad Ali, but really you're Marvin Gaye.

Anand Chokkavelu: I thought you were making it up at first. He's kept piling in amazing celebrities into that anecdote.

Ricky Mulvey: It would have been a good show. There's photos on the internet of Marvin Gaye walking out in his very slick boxing robe, jacket and Sammy Davis Jr. doing a dance routine. It did happen. It's also cited in My Brother, Marvin Gaye's brothers memoir, but that's just for the receipts. We can end it on taxes or we can end it with the bottom line.

Anand Chokkavelu: I'll put in taxes. Everyone loves taxes. Here's the last little bit. Say you're a 55% winning sports gambler and you're doing great. Even if you do that, Uncle Sam will still tilt it in an investor's favor, because with the stock market, you can get lower capital gains for holding stocks more than a year. That's not the case with sports gambling, you're just paying regular taxes. Then you also have retirement accounts that allow you to avoid debts like an IRA or a 401(k), and then your employer is matching your 401(k) in a lot of the cases. It's just, I don't know, even if there is a win, the stocks just beat gambling, I think.

Ricky Mulvey: Anand Chokkavelu, appreciate your time and for joining us for the Deep Dive.

Anand Chokkavelu: Thank you, Ricky.

Dylan Lewis: Quick heads-up. Tomorrow is Easter, so we won't have a show for you. We'll see you on Monday. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis, thanks for listening.