A survey conducted by personal finance website, NerdWallet earlier this year found 31 per cent of respondents view gambling as an investment.
With the explosion of sports betting and online gambling on one hand, and a more challenging environment for young Canadians to save for retirement on the other, that’s a problem.
If you’ve ever confronted a gambler on the subject, the response is often that; all investing is gambling.
Science backs them up to a point. Brain scans reveal the same reward centres are triggered when people place a bet or click “buy” on a stock. They share the same dopamine pathways that pushed our ancestors to take risks.
With the near extinction of defined benefit pension plans, most Canadians need to roll the dice to some degree to finance their retirements. Those with any workplace pension are usually enrolled in contribution plans with exposure to equities, or invest in equities through registered retirement savings plans (RRSPs) or tax free savings accounts (TFSAs).
Even the Canada Pension Plan (CPP) is heavily invested in global equity markets.
But that’s where to similarities end. The degree of risk in relation to the potential for reward varies wildly. It’s hard to know when gambling becomes investing but here are four stages that separate them.
Gambling is definitely gambling
MGM Resorts, which generates a good chunk of its revenue from gamblers online and in casinos, posted gross profit of nearly US$8 billion in 2024: a 39 per cent increase from 2021 according to data-cruncher macrotrends.net.
As restrictions ease on the gaming industry, MGM’s shares have risen in value by over 72 per cent since the onset of the 2020 pandemic.
While owning a piece of the house is definitely a good investment, the statistical chance of long-term success is virtually nil for customers because the cards are so heavily stacked in favour of the house.
The odds of winning at a craps table are higher than the slots, but the same restriction applies.
Some gamblers might get lucky over the short-term but consistent wins are either short-lived or fables. The casino makes sure of that.
Speculative investments that don’t produce anything are a gamble
Cryptocurrencies have skyrocketed in value over the past decade due to their meteoric rise from nothing to…nothing with a commonly accepted higher value.
The line between investing and gambling gets murky with speculative investments that don’t produce revenue-generating goods or services, such as crypto-currencies.
Critics say putting money in crypto is gambling because it has no underlying physical or digital assets and does not store value. Its current value is derived from the belief that others will also continue to believe in its value over time.
In addition, looser regulations have made crypto rife for illegal activity such as money laundering. Certain actors can also collude and eventually take control of the underlying block chain technology to create new coins for themselves - diluting it value.
Investments with no earnings might be gambling
Gambling drifts toward investing in the case of publicly-traded companies that produce something and generate revenue, but never show a profit when costs are deducted.
The degree of risk varies with the probability of turning a consistent profit at some point.
The current value of any stock is a reflection of the market’s confidence in the company’s ability to create or grow earnings.
Share prices in the fledgling cannabis sector, for example, soared from pennies to meaningless highs, to pennies again and the industry has yet to post consistent profits despite producing a marketable commodity.
Investing in profitable businesses is definitely investing
Legendary value investor Warren Buffett described gambling as a tax on those who don’t understand the odds.
That’s a lot coming from a man who has made billions of dollars by making sure the odds are in his favour.
He only invests in companies that earn and grow profits over time by growing their revenue, while keeping costs down.
That requires scouring earnings statements and establishing metrics to measure a company’s earnings in proportion to its current price, such as the price-to-earnings ratio. If the price of a stock lags the company’s recent past or projected earnings, it’s a buying opportunity. If the price is higher, it’s a sell.
Under those terms MGM Resorts might even be in Buffett’s portfolio.
