Motley Fool Money - 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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If you're 45 or older and at average risk, ask your health care provider about the Coligard test. Colagard is available by prescription only. Learn more or request a prescription today at colagard.com slash screen. Here's the beauty of the stock market. This is why 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 Onen Chaka, If the difference between gambling and investing is obvious to you, then you're in the minority. Ricky Mulvey caught up with Chalkaloo 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 is gambling represents an all or nothing bet on an outcome with a defined expiration time. So 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 in all or nothing bet,

and there is no defined expiration date. And 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 Lending Tree. 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 or actually gambling. Absolutely. And let's remember this is 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 investing and, of 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's kind of the same thing. And then through the pandemic, through even until today, like, 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 Robin Hood, they were offering like, 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 certainly uncertainty. There's uncertainty in everything in this world. But what 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 risk and 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 and instead just using it to spend more money on vacations and things like that instead of putting away for retirement. And then that's that's really a sad outcome.

The other thing I don't want to do in this conversation, though, is like get into the moral argument of gambling. I think a lot of like, it's exciting. Like, and I think that many like 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. You probably don't want to hear about their trip to the casino that weekend or if they bet on the MLB that past weekend. So let's put our cards on the table, Ricky. Yeah. We, I think we both like the sports gamble and we both like to play poker. Correct? I do. I don't play poker as much. I do. I do miss the days of having 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. I've been floating it out there. I would say I lose about $200 to $400 a year betting on sports. I've played blackjack craps. I'm going to, for 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 am also aware that the Golden Gate Casino has the lowest table minimums in town. 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 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 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. And then sports gambling, yeah, I do the apps and play the sign-up bonus games and things like that. And my goal is to be kind of break-even and be playing with house money. I think I can say, because I do a lot of futures bets, the long-term investing of sports gambling, right?

So I have money on next year's 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 break-even, 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 itself, not covered on the CFA. Yeah, I also appreciate the distinction of, what is it, long-term investing for futures

and not an interest-free loan to the sports books. That's right. That's right. Well, that's the lie you tell yourself, right? 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. Yep.

I mean, Ben Graham is the value investors, value investor, which is the hardest core. the hardest core investors, right? And he recognized it. He used to call 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. He smoked cigars on the sidewalk 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 flipping a coin which would be pure gambling then above that you have sports gambling then meme stocks after meams poker you have poker is a better investment than

gambling you know i'd argue that no 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 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. Turn around 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 base. index fund for your pure investing. That's the continuum. Right on. Maybe you could argue, right? Like the poker and options. Well, depending on how you're doing it, poker, I might even argue, it's higher, but there's no underlying business, right? It's probably not investing, but it's a way to make money. You know, maybe, you know, 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

person, 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, right, what we talk about is it's almost an advantage for, we talk about it as an advantage for small-term investments. 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, um, 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 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. 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.

It might seem like a dumb question, but there's plenty of money there. 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, you know, 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 that, that, that, that, we're going up against math geniuses and AI developers and all trying to play the, the same game. But, 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. A really bad investor is making 5% a year when the market's up 10% a year. That's still, you're still making money.

But let's talk about the sports gambler. I mean, it is what you call a zero sum game. game, right? You're against other other gamblers or the house. And you get, well, in sports gambling, it's against other people. Zero percent return minus the betting, you know, minus the betting app Vigs, plus some sign up bonuses and stuff. But, but if you're, if you're betting a lot of money, those sign up bonuses round to zero. If you're an excellent sports gambler, you can take, you know, zero percent up to a few percent up, you know, a great professional gambler. can win, you know, 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, you know, getting that 5% after Vigs versus a 10% return for a good investor. 15% or average, 15% for like a great stock market investor or 20% if you're Warren Buffett. Meanwhile, you're eking out those few percentages as a sports gambler if you're great. Yeah, I think the VIG 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 boosted bets and the promos.

So on a lot of these, a lot of sports books right now, like Draft Kings and Fandul, 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 don't think that that's true. I think it's more akin to like a deal at Macy's or T.J. Max, or they say, hey, we've marked down this t-shirt from $50 to $15. But you don't necessarily know if they ever sold the T-shirt for $50. 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. But, yeah, the House is going to win. Or if you want to beat the House, it takes an intense amount of work to get to that 5%.

So 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. found, great name by the way, Rhodo Grindr, found that the 100 ranked players in these daily fantasy sports leagues were winning 8773 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 hardcore data analysts. They're spending 16 hours a day on this stuff. One of the people who was 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 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've got to kind of like commit your life to it. It's a miserable life as a, you know, being a poker grinder. 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 Titoro's Joey Kinnish. He's the one just grinding. He's like, nope, I'm not going to take the big risk. Just every day. 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 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 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. But yeah, just because you can doesn't mean. you will. And it's not, you know, 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 insurance policies. That's way less fun than playing poker. And then a lot of them probably have a pretty good understanding of game theory.

So I bet there's some consultancy kinds of jobs that would like that. Okay. 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, you know, 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 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, 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 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, 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. 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 in 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. And when I do that on it, when I play too many cards on a poker table, quickly get into trouble, you know, in the midgame,

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 positions in the stock market where you say, 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 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 is 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 win, you've only won X amount in stocks. 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. A lot of the sharp, I'm not interested in doing this kind of sports betting, but a lot of the sharps look for those really small ponds.

They're probably, they might not be betting on the NFL, but they might know like 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 on for small caps where you don't have a lot of eyes on 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. And I think that there's more opportunity or I like listening to the folks that really pay attention to those companies. 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

time, you know, you're in trouble and the opposite of that is finding a really bad, a few bad players at the table will help you out, going at 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 Gay. Muhammad Ali was a part of this like charity event. And the highlight of the charity event was that it was Sammy Davis Jr., Richard Pryor, Marvin Gay, and then the guy who played the trainer and Rocky were all going to 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 Gaye because he was like trying out boxing. And he's like, I'm going to fight Muhammad Ali. Like we're going to have a real match and we're going to 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 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 Gay. I thought you were making it up at first. He's kept piling in amazing celebrities into that anecdote. It would have been a good show. There's photos on the internet of Marvin Gay walking out and is a very slick, slick boxing robe, jacket, and Sammy Davis Jr., like, doing a dance routine. So it did happen. It's also cited in my brother, Marvin, Marvin Gay'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, you know, 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 even, even if there is a win, the stocks just beat, beat gambling, I think. There you go. On in Chakavalu. 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.