Is Investing Gambling?

If you are new to investing you might be wondering if investing is gambling. The short answer is yes, investing is gambling. It involves putting your money at risk toward an outcome that is uncertain. That's why financial pundits, fund managers, and business owners often describe their actions as making a bet.

Nevertheless, there is a big difference between buying the shares or bonds of a company (or fund that holds such assets) or real estate and buying a lottery ticket or playing roulette at a Las Vegas casino. And it's not just that you know your odds with the lottery ticket and the casino.

When you invest in stocks, you are buying an ownership stake in an actual business. When you invest in bonds, you are lending money to the bond issuer. When you invest in real estate, you are buying an actual property. When you invest in yourself, you are spending your money and/or time to better yourself in some way.

All of these are a gamble. They are risky in that you can lose all of the money and time you devoted to them. The business may fail, the borrower may default, a whole host of catastrophes could befall a property (fire, flood, tornado, neighborhood going down the drain, etc.), and you might not have anything to show after investing in yourself except a smaller bank account. Yet, these risks are different from betting on where a ball will land or which horse will win a race.

I think of investing as productive gambling. Putting money into a company or lending to it allows the company to  create and sell a product or service that solves someone's problem. This has the potential to create wealth, and not just for yourself. The same with investing in real estate, which takes land and makes it useful, whether it's providing someone with a place to live, work, grow crops, extract resources from the ground or the like. The same again with investing in yourself. Learning a new skill, having a healthier body, and so on enables you to do more things and do them better, and that provides value to the world beyond just you even though what you do is solely for your own benefit.

Everything in life is a gamble. You can't choose not to gamble because that choice is itself a gamble. For example, every time you go out of your house something bad could happen to you. But never leaving your house has its own risks, including not being able to earn enough money to live.

Holding cash instead of investing it has a risk too. The purchasing power of the cash will erode over time because of inflation. Choosing to hold cash (which we can call "investing in cash") rather than investing it in some other asset is a bet that the cash will retain more of or grow its purchasing power than the other investment will. The point here isn't to question the validity of the choice, but to point out that no matter what you do it's still a gamble because the future is uncertain.

Since we're gambling no matter what, it's better to make the surer bet when we can. If you think about it, investing is a way to mitigate the risk of cash losing its purchasing power.

But as with all bets, investing comes with its own risks.

There are ways to mitigate risks in investing, just as we look both ways before crossing the street and buy insurance on our house. In investing we diversify our assets. Instead of buying a stake in one company, we buy a stake in many. Instead of lending money to one company or government, we buy the bonds of many. This way, if any one of them fails, we lose only a portion of our investment. We also invest in different kinds of assets (stocks, bonds, real estate, and so on), so that if any one of them does poorly, our overall portfolio won't suffer a severe loss.