Just how different is the Spaceship Voyager app from your mate’s sports betting app? And which one’s a better place for your money? Let’s take a look.
A common misconception about investing is that it’s just another form of gambling.
While both investing and gambling involve taking on some risk for potential return, that’s about where the commonalities end.
Investing means putting your money to work in some sort of undertaking or asset to generate a return.
In the case of investing in the share market, you’re purchasing a portion of equity in a company with the expectation of generating an income, profit or gains.
Gambling, on the other hand, is when you risk your money to guess the outcome of an uncertain event. If you guess correctly, you’ll receive a higher return than the amount you risked.
One of the main reasons people gamble is to make more money, though factors like addiction, peer pressure, and advertising can all play a role.
So what should you keep in mind? And why do we think investing’s a better bet?
Here are five key differences between investing and gambling
1. Level of risk involved
Risk is a key factor in both investing and gambling. However, the kind of risk involved in both activities is fundamentally different.
Investing involves a variety of risks, which vary depending on the asset class and specific product that you’re investing in. Some of the types of risk you may encounter when investing in the stock market include:
Market Risk: the risk that your investments may decrease in value due to economic developments or events that affect the entire market, such as regulatory changes, rising interest rates and the impact of foreign exchange rates.
Concentration Risk: the risk of loss if all your money is concentrated in one type of investment — which is why diversification is so important.
Inflation Risk: the risk of declining purchasing power if your investment doesn't keep up with the rate of inflation.
Horizon Risk: the risk that your investment timeline could change due to unforeseen circumstances, causing you to have to sell your investments earlier than you might have liked to.
When it comes to gambling, risk is about the likelihood of an event occurring — and the returns are directly correlated to that probability.
Take betting on the outcome of a tennis match, for example.
The favourite is the player that is deemed to be statistically more likely to win, which is based on factors such as past performance, and their physical and technical attributes.
Let’s look at an example.
During her 27-year tennis career, Serena Williams won 73 singles titles and was ranked world no. 1 for a total of 319 weeks. Her strength and offensive style of play made her one of the most dominant players on the circuit, and she is widely considered to be one of the greatest players of all time.
In 2013, Williams had a 34-match winning streak, which would be the longest of her career. Had you wanted to bet on one of her matches during that time, it’s very likely that she would have been considered the favourite to win; ie. she would have been considered “the safe bet.”
Betting on the favourite can be seen as less risky than betting on the underdog. Therefore, the returns people receive for placing a winning bet on the favourite will likely be much lower than placing a winning bet on the underdog.
However, as you’re betting on humans with the potential for human error, the element of risk is always present.
Even if Serena Williams were to be winning in a match, there was always the chance that she could sprain her ankle during the match and be forced to retire, conceding the defeat — causing you to lose the bet.
Generally speaking, when it comes to gambling, you’re more likely to lose money than you are to make money — so to counteract that, the payout of a winning bet has to be higher than what was risked to make it appealing to punters. Gambling also heavily involves chance, whereas investing is more about strategy and analysis.
2. Ownership
When you invest, you directly own shares in a company or units in a fund, but when you gamble you don’t own anything.
Let’s take Nike, for example.
We currently hold Nike in our Spaceship Universe portfolio. If you bought 10 shares in Nike for US$600 on 2nd Jan 2018, you’ve exchanged your money for a percentage of ownership.
Why is ownership important? Because ownership means you control an asset, which means you can reap the benefits of the value that asset creates. Those same 10 shares, which were valued at US$60 each six years ago, are now worth approx. US$72 each. The capital invested helped the company to grow in that six-year period, which means that the value of your portion of ownership also increased.
When you own stocks in a company or units in a managed fund, you may also have the right to receive income from those assets in the form of dividends or distributions. At present, Nike’s annual dividend yield is 2.04% — which means you would earn 2.044% of the share price in dividend earnings as an owner.
As gambling is staking money on the outcome of an event, as opposed to being an asset, it doesn’t inherently hold any value — you just receive a payout if you bet on the outcome that eventuates.
3. Time frame
While investing in the share market is about giving capital to a company that you believe has the potential to grow over time, gambling is largely about the chances of an outcome occurring in the near future.
Time horizons are a key factor that investors should consider before making an investment. Generally speaking, the longer you have to invest, the more likely you are to receive a positive return. This is because you give your investments enough time to grow over time, and ride out any volatility. In the case of equities, the value of shares tends to grow over time, as long as the company you’ve invested in grows and matures.
Managed investments, such as our Spaceship Voyager portfolios, should provide suggested investment time frames in their investment documents. For example, our Spaceship Voyager PDSs and TMDs suggest an investment timeframe of 7 years. This is to help you decide whether the investment might be suitable for you.
In contrast, gambling tends to be based on a one-off event that happens at a particular point in time — say, betting on the outcome of the 2022 NFL Grand Final.
4. Compounding returns
With long-term investing, you can reinvest the returns you’ve made from dividends so that they compound over time.
Returns from gambling are generally a one-off event, so if you want to make more money off your earnings, you’d have to wager them on another event.
5. Humans can influence the return of investments, but not of gambling
One of the things that sets apart investing in equities is that unlike other types of investments (like property or bonds) is that you have a whole team of professionals with a vested interest in growing the business that they work for — so you are putting your money behind people who can impact the value of your investment.
In the case of Nike, they have a highly-experienced executive team, led by CEO John Donahoe, and more than 70,000 employees worldwide who are working to ensure the success of the company.
This is not the case with gambling. It’s usually illegal for people to interfere with the outcome of gambling — one example of which would be match fixing in sports betting. There are harsh penalties for match fixing, including life-time suspensions from the sport, hefty fines and even jail time.
Investing’s a tool for growing wealth over time
To answer the original question, no, investing isn’t another form of gambling. Rather, it’s a tool for growing wealth over time — but that doesn’t mean it doesn’t come without risk. While gambling can be a way to make money, it is very different in nature to investing in the share market — not least of which because it heavily relies on chance.
As for me, I’d back investing any day.
If you struggle with gambling, visit the Gambling Help website to access services and resources in your state.
The Spaceship Universe portfolio invests in Nike at the time of writing.
Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.
The information in this article is prepared by Spaceship Capital Limited (ABN 67 621 011 649, AFSL 501605). It is general in nature as it has been prepared without taking account of your objectives, financial situation or needs.
