Are you Gambling or Investing?

We’ve all heard the old adage that investing in the market is the same thing as gambling. With America’s #1 wagering event, the Super Bowl, still fresh in our memories, it seems like a good time to take a look at the truth behind that statement.

 

According to mint.com, $87.5 million worth of legal bets were placed at Nevada sports books on last year’s Super Bowl.

That sounds like a lot, until you read the next line. Legal wagering accounts for only 1% to 1.5% of all the gambling done on the big game. Do a little math and you’ll find that an estimated $8.6 billion was wagered on the Super Bowl last year, and that only accounts for gamblers in the United States.

Obviously the Super Bowl generates a lot of betting action, but when it comes to investing in the market you would assume that more people would be on board, right? Apparently not. A Gallup survey taken in 2011 discovered that 54% of Americans own stocks and according to Pregame.com writer RJ Bell, over 50% of Americans bet on the Super Bowl. However, while the rates of participation are similar, there is a stark difference between investing in a promising company and picking your favorite team on the money line.

The biggest difference is asset ownership. Many people forget that when buying stock in a company you’re not only asserting your opinion that the value of that company will rise, but also taking a partial ownership of the assets of that company.  The money that you invest is equal to a piece of those assets.  Try explaining to Steve Bisciotti how the $1,000 bet you made on the Ravens at +3.5 should have gotten you a seat in the owner’s box when the big show was in the Superdome.

If you’re thinking that market investing isn’t as exciting as the all or nothing bet you placed February 3rd, you may be interested to know “that the neurological similarities between traders and gamblers are striking. Whether they are about to make a trade or plunking down a bet,” said Maggie Baker, a clinical psychologist interviewed by the Wall Street Journal, “the pleasure center in the brain lights up.” So, it feels good to bet, but it can feel just as good to invest. The trick is making sure that you’re actually investing smart, and not just using the market as a surrogate sports book.

Jeff Mackie, writing for Breakout on Yahoo.com, has identified three indications that you may be doing more gambling than investing with your portfolio.

  • Stock Picking – Putting money into one stock, instead of diversifying across several companies, makes investments much riskier.
  • Market Timing – Buying low and selling high is the key, but making sure that there is balance across your portfolio is more important than predicting booms and busts.
  • Track Record Investing – Hanging your future on an investment manager, no matter what his track record, is unwise.  Remember, it’s the market that makes the return not the manager.

Equities will not always be as strong as they have been in the last three years but a good financial planner can help you plan, diversify and rebalance your portfolio with an acceptable risk tolerance. Perhaps more importantly, your financial planner can provide the education and coaching to help you understand the differences between gambling and prudent investing.
Then, one day, instead of just planning a party, you’ll have enough money to buy your own ticket to the Super Bowl.  Just don’t forget, if you do bet on the game and win, the IRS wants its piece. Gambling winnings, just like dividends, are taxable.

No strategy including diversification can assure a profit or loss.

http://www.mint.com/blog/trends/betting-on-the-bowl-how-much-is-wagered-on-the-big-game-012012/
http://www.gallup.com/poll/147206/stock-market-investments-lowest-1999.aspx
http://online.wsj.com/article/SB10001424052702303499204576388151661037330.html
http://finance.yahoo.com/blogs/breakout/3-signs-gambling-not-investing-143026282.html

Photo courtesy of: www.novelinvestor.com