Trading is a form of Gambling

The argument that stock market trading/investing isn’t gambling because it isn’t totally dependent on chance, could equally apply to someone who bets on horses or dogs and professes to do so from a sound knowledge of form.

If someone routinely studies racehorses, scrutinises their ancestry, assesses their past and recent performance in comparison with other racehorses, analyses their management and operators, carefully weighs their prospects and takes a judgment on how they might perform, takes into account the odds being offered and backs their judgment with a stake determined by wise money management. Are they a gambler? A trader? An investor?

Likewise, there is an element of chance in stock market trading/investment (including investing for dividends, which are rarely guaranteed). I am happy to concede that what we are doing is gambling – even if we consider ourselves good students of form ;o)

If I routinely study stock market companies, scrutinise their history and structure, assess their past and recent performance, analyse their management and operators, carefully weigh their prospects and take a judgment on how they might perform, take into account the numerous risks attached and back my judgment with a stake determined by wise money management. Am I a gambler? A trader? An investor?

Why do you think people trade? Oh right you think that they are playing simply because they like to punt. Here’s a thought for you to ponder. Why do thousands of girls try and be Miss America, why do millions of kids spend hours on the basketball court practicing their jump shots every day for hours? There are lots of reasons, yes these activities are fun for some people just like trading is, but the few successful people (Miss America winner, nba player, trader pro) inspire the masses. Is every little girl who participates going to become Miss America? Is every boy going to make it to the NBA because he spends every spare moment on the basketball court? Absolutely not but the masses see the huge money and the fame associated with these activities and they are willing to try.

I am happy to accept whichever verdict – but I consider both such players to be similar.  Both are making a judgment on likely performance and backing that judgment with cash.  The mere fact we talk about ‘risk’ and ‘reward’ puts us in the same category as gambling. The rewards may not be as great as sticking it on a 50/1 outsider at Haydock and we may not risk losing our whole stake in the process thanks to tight stops but unless there is no risk to your stake at all, investing is a form of gambling.

“A good trader should be able to hold their own at poker, and a good poker player should be able to be an ok trader, hence a lot of poker players are traders, and traders poker players…”

In fact, any business venture is a gamble, whatever you do in life you need that little rub of the green.  Starting a business is a gamble because most fail and you are unable to rely on a return from the money you put into the business. If you play Blackjack you can increase your odds by card counting and increase them further by understanding your hands mathematical probability – but it’s still gambling.

You could just as easily label traders fortune tellers, that’s what we are trying to do predict what’s going to happen down the line.  For that we use our technical analysis and fundamentals to give us as much of an edge as we can glean and then proceed to make our bet, gambler used to bother me but now I don’t really care in fact as far as the tax man is concerned it’s a blessing!

The hopes and dreams of future share price or takeover offer are pure speculation based on past performance – as in stacking the odds on your gamble. As the FSA man says – past performance is no guarantee that it will be repeated in the future…. bla, bla, bla. 80% of traders fail to make money over the longer term regardless of daily or intraday trading – says it all.

So although I don’t instantly identify myself as a gambler (and have never been into a betting shop or casino) – but I don’t feel offended when someone chooses to label me a gambler when they hear what I do ;o)

“I’d agree that putting money on the stock market is much like putting money on a race or a game, or indeed the spin of a wheel or the turn of a card except you can place or withdraw the bet at any point during gameplay and during which odds will change and therefore so will the return and of course there’s a difference between someone that takes blind risks with little recognition of timing or maybe even odds offered and someone that takes carefully calculated risks.”

These days you can do the same with sports. You can exit the bet ‘in-play’ when odds alter sufficient to make cashing in a more prudent option than awaiting final outcome. Just like with stockmarkets ;o)

“..long term buy and holders such as pension funds make money not from speculating on the share price but from investment returns on their dividends. They have no interest in next year’s s/p because if the price goes down their dividend goes up…”

Errm.. not sure I agree with that logic ;o)

The dividend only goes up if it goes up, in absolute terms (i.e., in the cash amount vs. past cash amounts). The fact that, in relation to a falling stock price, it shows as a rising percentage, doesn’t necessarily mean it’s gone up. If the dividends collected over many years from a stock, outweigh the decline in the realisable capital value of the holding, the long-term investor gains. But not if they have to realise a capital loss exceeding the collected dividends. There are plenty of pension funds and others who get it wrong.

EDIT: correction: If you were referring to investment returns ‘on’ their dividends, rather than the dividend as the return (ie, a return obtained by placing the collected dividends elsewhere in a no-risk setting), I would agree in respect of that secondary pot — but not the initial pot, capital losses on which could still outweigh gains.

Note: One obvious difference between sports betting and financial spread betting is as follows. With sports betting the bookie can only win if his customers in aggregate lose. With spread betting both the provider and its clients can both win, just as is the case with stockbrokers. In fact in bull markets a win/win situation would be the norm.