Motley Fool Hidden Gems Investing - Gambling Versus Investing

Episode Date: April 8, 2023

A survey from Lending Tree found that a majority of Americans thought investing was just as risky as gambling. And sure, the stock market can be a casino, but it doesn’t have to be. Anand Chokkavelu and 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.   Host: Ricky Mulvey Guest: Anand Chokkavelu Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. here's the beauty of the stock market this is why you know people call it the greatest money making engine ever and it's because if you're a mediocre 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 I'm Dylan Lewis, and that's The Motley Fool's Anand Chakavallu. If the difference between gambling and investing is obvious to you, then you're in the minority.

Ricky Mulvey caught up with Chakavallu for a deep dive on the differences, similarities, and gray areas between gambling and investing, why small investors can win from the games that Wall Street traders play, and what investors can learn from gamblers. I think there's an assumption that many would say, oh, I know the difference between investing and gambling, but that distinction is not that clear. And I think it's worth kind of doing a deep dive into the difference between them and why it's important. Very excited for this, Ricky. Yeah, there is a lot of gray area here and we're going to explore all of it. To me, I define it as

gambling represents an all or nothing bet on an outcome with a defined expiration 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. To that, I'd add that investing is putting your money into something productive or useful like a business versus just playing a game. The part of this that got me thinking about the difference was this. It was 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. Absolutely. And let's Remember, 2019 was before meme stocks were even a thing. So those numbers are probably higher at this point. Investing can feel like gambling, and the lines have been blurred. One reason is that 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, oh, yeah, investing in the stock market is kind of the same thing. And then through the pandemic, even until today, the line between stock trading and sports books got kind of blurry. Some of that was on purpose, some of it was not. But if you look at a company like Robinhood, I think they were offering sign-up bonuses to start trading stocks. And if you're incentivized in the same way to start investing and start gambling, then I can see where those lines get blurred. Yeah. I mean, there's uncertainty in everything in this world but what what i really and what i really hope people don't do and i know people do

it because you hear it you know from people is to just equate the two and say oh well there's there's risk in any anything and use that as a reason for inaction for not doing things like putting money in their 401k or investing in the stock market instead just using it just to spend more money on vacations and things like that instead of putting away for retirement. That's really a sad outcome. The other thing I don't want to do in this conversation, though, is get into the moral argument of gambling. It's exciting. I think that many folks in the financial industry would not admit to that with good reason. If you have a financial advisor and they're investing your money for retirement like you probably don't want to hear about their trip to the casino that

weekend or if they bet on if they bet on the mlb that past weekend so let's let's put our cards on the table ricky yeah we i think we both like to sports gamble and we both like to um to play poker correct i do i don't play poker as much i do i do miss the days of having a a regular at-home poker game and we've talked about it my dream is to have our highview park dads group have a regular game been floating it out there i would say i lose i lose about 200 to 400 a year betting on sports i've played blackjack craps i'm going to for for a marriage celebration i'm going to go to las vegas later this month and i'm mainly going to be there for to celebrate with with my friends i am also aware that the golden gate casino has the lowest table minimums in town um

like i that you know what if there's one takeaway you can lose plenty of money at low stakes if you're going to gamble at low stakes you can lose so much money quickly and you'll you'll you'll do fine right in that check the key is to stay focused yeah stay focused on losing money yeah how about you yeah for me yeah so similar where you know i love i love playing poker i'd love you know home games that kind of thing or going to the casino we've got one in the dc area a couple in the DC area now that we didn't used to have to go all the way up to Atlantic city. Um, and then sports gambling. Yeah. I, I do the apps and play the signup bonus games and things like that. And uh, my, my, my goal is to be kind of break even and be playing with house money.

I think I can say, cause I do a lot of futures bets, the long-term investing of sports gambling, right. Of like the, so I have, you know, money on next year, super bowl, things like that, division winners, things like that. So 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. 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 kind of thing. I'm a CFA who punted on the bond math section in one of those. And let's be clear, the sports gambling, it's not covered on the CFA. I also appreciate the distinction of long-term investing for futures and not an

interest-free loan to the sportsbooks. That's right. Well, that's the lie you tell yourself. 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. Ben Graham is the value investor's value investor, which is the hardest core investors. He used to call it speculating versus investing. Speculating basically meaning gambling. He's talking stocks. They're not on sports and not on casinos or anything. Purely on stocks, there is gambling. He smoked cigars that he found on the sidewalk. That's how hardcore he was.

Right on. But I liked the rough continuum you laid out where there's essentially like in terms of, let's go from pure gambling to investing. You kind of have flipping a coin, which would be pure gambling. Then above that, you have sports gambling. Then meme stocks. After memes, poker, you have poker is a better investment than gambling. you know i'd argue that you know this is we can we can do a lot of you know arguing on this so poker because it is a game of skill with a lot of luck involved so here's here's the analogy or here's the example i'd use if you had phil ivy 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 a thousand hours, whoever has more money is going to walk out of there. I'm dead 99.99% of the time. Okay. So there's at least a lot of skill. Well, I hope you don't run into that situation. So yeah, you have flipping a coin, sports gambling, meme stocks, poker, then options. So that's the all or nothing bet on the outcome, venture capital, turnaround investing in stocks. 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. Then above that is buying a broad-based index fund for your pure investing. That's the continuum.

Right on. Maybe you could argue, 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 as a way to make money. Maybe that's a different distinction. The two things that poker and options, or 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. So 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. Absolutely. And for stocks, what we talk about is it's almost an advantage. We talk about it

as an advantage for small-term investors because Wall Street folks, they're playing against other Wall Street folks for short-term gains. And you talk 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. And sometimes you get a great buying opportunity because the short-termism drops the stock 50% and you can get in on a great business. 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 where they're chopping. Yeah. Window

addressing 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 yeah we're having to get rid of a company and a fund because oh it no longer fits the dictates of that fund or something enters or exits the s&p 500 yeah and i want to get into like the sober look at how people make money in sports gambling might seem like a dumb question but there's plenty of money there is Is there any money to be made in sports betting? I mean, we all think there is, right? 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.

Uh, but, uh, you know, let's step back to the actual math behind some of this too. So you got to get that aspect, but then here's the beauty of the stock market. This is why, you know, people call it the greatest money-making engine ever. And it's because if you're a mediocre 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? A really bad investor is making 5% a year when the market's up 10% a year, that that's still, you're still making money,

but let's talk about the sports gambler. I mean, it's a, it is what you call a zero sum game, right? You're against other, other gamblers or the house and you get, well, in sports gambling, it's against other people. 0% return minus the betting app VIGS plus some signup bonuses and stuff. But if you're betting a lot of money, those signup 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 win. 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 that 5% after VIX versus a 10% return for a good investor. 15% for average. 15% for a great stock market investor

or 20 if you're warren buffett meanwhile you're eking out those those few percentages as a sports gambler if you're great yeah i think i think the vig is is the big part and a lot of those have i shouldn't say been erased but the illusion of them there's an illusion that they're gone especially with the the boosted bets and the promos so on a lot of these a lot of sports books right now like draft kings and fan duel um 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 okay oh that edge on the casino side is gone and i 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 this uh this t-shirt from 50 to 15 but you don't necessarily know if they ever sold the t-shirt for 50 bucks absolutely and to be clear guilty is charged on all of it i love profit booths you know like oh wait i get a 50 you know i know the masters there's some now you know there are things like that yeah i mean it's exciting and it's interesting and but yeah the house is is gonna win 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 was winning in those games. It's a company called Roto Grinder. Great name, by the way. Roto Grinder 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 and that's illustrative because a lot of those people in that top 100 they're they're hardcore data analysts they're they're spending 16 hours a day on this stuff one of the people who's quoted in it when when asked how much time do you spend on this they said uh do we count the time i watch watching sports because if so then it's 16 hours a day you get eight hours to sleep and do whatever else you want and for a lot of those hardcores 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 kind of like commit your life to it it's a miserable life as a you know being a poker

grinder uh and people you know you think you know the movie rounders right we all think we're matt damon and his mike mcdermott but to really make money the hero of that movie is john tatura's Joey Kanish. He's the one just grinding. He's like, Nope, I'm not going to take the big risk just every day. Not, not exciting. Just doing it every single day. So the best poker players make their money by sitting at the table for just marathon sessions, eight hours, 12 hours, 24 hours day after day, month after month, and just doing nothing, right? Check, check, check a few good hands a session all to make what an office job makes you know we think about the big the big swings and the but to get those big swings it's just like you know there was that guy who put his

entire life savings on a roulette spin yeah you can do that and he's going to have a big winning if he if it comes out good but if it doesn't well you don't hear that story i'm not trying to continue the hate train here but i also think that we brought you brought you actually brought this up i'm not stealing your take the professional poker players you see aren't making a profit on playing professional poker because it's a negative sum game they're making money on sponsorships yeah and even if they even if they are it's not as much as right like all those sponsorships and tv shows and all that kind of stuff um but yeah just because you can doesn't mean you will and it's not you know you're not you're not playing three hours in a day before dinner on a cruise

or in vegas for like two days it's it's rough and by the way just just as a side note if you do take that you know 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 no i mean you have you know no i disagree if you wanted to work in like insurance adjustment maybe you got like you have a good idea of risk so maybe you could write you could write insurance policies that's way less fun than playing poker um and then a lot of them probably have a pretty good understanding of game theory so i bet there's some some consultancy kinds of jobs that would uh that would like that okay i i will to be fair you have transferable skills but will the employer believe them and like okay well yeah you got to

put a little extra work in to get that insurance job and yeah you know what i'm like wait how good of a poker player were you? Why are you done? You're going to, I'm going to trust your odds and your skills. I'm so good at poker. Now I need to, 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. Absolutely. For me, uh, poker helps remove my patience and humility. So investing in a stock, right? It can take years and years before you figure out if you were right, right? The classic thing of, oh, my stock's down 60%, but no, 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 know. And then it takes a lifetime to figure out if you're a market-beating investor. I always say on my deathbed, I can tell you, you know what? I think I can beat the market now. Good night. 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. I mean, you can still fool yourself one way or the other and bad session, bad run of cards, all that kind of thing. But for me, the same things are true in poker and in 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. And when I do that on a, when I play too many cards on a poker table, quickly get into trouble, you know, 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, you know, it's down to earth. And that helps me with bigger, you could say bets or wagers or, or positions in the stock market where he's like, all right, you know what, maybe I need to take a couple extra days and do a few more hours of research before buying that stock. I think for me, it's helped with loss aversion a little bit, which, which is both healthy and unhealthy. You understand that every stock you buy isn't going to be a 10 bagger, but also, I mean, there's the key difference, which is that like money lost in

a sports bet will never come back. Money lost on a stock does have the possibility of coming back. And while there's a one-to-one loss on a sports bet, so you can, you can win, you've only won X amount in stocks. It's, it's a couple of bets that are going to drive the majority of your returns probably. And then the other thing that I think it's affected me is it's encouraged me to fish in smaller ponds. I'm not interested in doing this kind of 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. They study it and they try to find inconsistencies in those markets. 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 taking a crack at those in a meaningful way. I like listening to the folks that really pay attention to those companies. 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. The opposite of that is is you know finding a really bad a few bad players at the table will help you out going into like small caps things like that and that kind of research really can pay off it reminds me of like 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 like charity event and the highlight of the charity event was that it was uh sammy davis jr richard prior marvin gaye and then the guy who played the trainer and rocky were all gonna spar around with muhammad ali and most of them agreed to do like sort of like a comedy show like a dance routine a bit that kind of thing except marvin gay because he was like trying out boxing and he's like i'm gonna fight muhammad ali like we're gonna have a real we're gonna have a real match and we're gonna see what happens and muhammad ali he encouraged him not to do that but he did and marvin gay got beat up he was humiliated and he 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 in sports gambling. If you're playing a game, sometimes you think you're Muhammad Ali, but really you're Marvin Gaye. I thought you were making it up at first. He's kept filing in amazing celebrities into that anecdote. It would have been a good show. There's photos on the internet of Marvin Gay walking out in his very slick boxing robe, jacket, and Sammy Davis Jr. doing a dance routine. So it did happen. It's also cited in my brother Marvin Gaye's brother's memoir, but that's just for the receipts. Do you want to end this? We can end it on taxes or we can end it with the bottom line. I'll put in taxes. Everyone loves taxes, right? So here's the last little bit. So say

you're a 55% winning sports gambler and you're doing great. Even if you do that, Uncle Sam still tilts 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. And then you also have retirement accounts that allow you to avoid taxes, like an IRA or a 401k, and then your employer is matching your 401k in a lot of the cases. So it's just, I don't know, it's, it's even, even if there is a win, the stocks just beat, beat gambling, I think. There you go. Anand Chakravallu, appreciate your time and for joining us for the Deep Dive. Thank you, Ricky. 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 interests 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.