How different are gambling and investing?

Investment in stocks and shares is often described as gambling, because while the investor may have done all the research and the company have everything in place to succeed, the market does not always work in the way people expect, and supposedly strong companies do fail.

All investing is gambling, but with enough research and planning, you can limit the risks, or Peter Lynch has said

“An investment is simply a gamble in which you’ve managed to tilt the odds in your favour.”

Investment does have a positive impact on society, however, with investors providing the money needed to make businesses succeed and capitalism work. This is not true of all investors, with short term trades doing little for society or growth, with day traders generating money with little discernible wider benefits. As Warren Buffett has said:

“Wall Street likes to characterize the proliferation of frenzied financial games as a sophisticated, prosocial activity, facilitating the fine-tuning of a complex economy. But the truth is otherwise: Short-term transactions frequently act as an invisible foot, kicking society in the shins.”

So what about gambling? The general rule goes that when you are playing against the house, the odds are in their favour. In blackjack, depending on the rules being played, the odds are around 6% in favour of the house. However, if you play a “perfect strategy” then this advantage can be reduced down to 0.5%.

Counting cards can also change those odds a little, with mathematicians determining that a card-counter in blackjack gives the player a 1.5% advantage over the house, but such practices are frowned upon, and will get a player kicked out of many casinos.

Gambling on games such as blackjack certainly do not offer the same benefits to society as long term investment in young companies, such as the way angel investors and venture capitalists work, but gambling can be fun when done responsibly, and the odds are actually better for the player than many forms of traditional investment.

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