Is Gambling a Sort of Investment and Investment a Sort of Gambling

Barely two months ago in November 2010, there were lots of sound and fury over the huge and continually mounting prize pot of lotto in the Philippines. The hype was building up by the day as the grand lotto prize crossed the half-billion peso mark. I wanted to write about it then but unfortunately, there were higher things in my pecking order. Now I think the time has come to say something about this issue of gambling: whether gambling can be considered investment of sorts. Or whether investment can be considered gambling.

At the heyday of the lotto grand prize craze, popular figures and even politicians joined the betting fad and the press lapped them all up, further fueling the hype. With the pot prize fast approaching the billion peso mark, the whole scenario then had all the makings of a mania – an unsustainable boom-bust movement.

It would have been comparable to a Ponzi-like bubble except that the multitude of bettors were indeed, bettors, and did not really expect to win or get back their money and get returns in the sense of being investors. Or their frame-of-mind was driven much by wistful thinking rather than a strong expectation of fantastic returns.

That is the fortunate and redeeming aspect of it. There is a safety net inherent in gambling that prevents it from degenerating into something like the Albanian Episode mentioned in our post on “The Curse of the Pyramids”- a scenario where mobs rampage through the streets demanding the fantastic returns promised on their money.

Some avid fans (to use a rather soft term) of lotto and other forms of gambling believe that their regular bet in the game is really some kind of investment. They strongly feel that it is only a matter of time that they will win the pot. I overheard a housewife once remarked to another housewife that she could not stop betting in lotto anymore as she already lost so much money through years of betting and that the only way she could recover is by winning the pot which she really believed eventually she will.

Poor souls! Winning the prize pot indeed is something the compulsive bettors expect. And that will be the time they will get the return for their sort of investment. So that ‘s how the reasoning goes.

Tomes can be written about gambling and the psychology of why people tend to get addicted to it. But our interest and concern here is simple- whether gambling can indeed be considered investment. Or whether investment can be considered gambling.

Well, this is really just a simple issue and there is only one way to approach this. Let us define and explain what gambling is and also define and explain what investment is.

Most online dictionaries define gambling as any behavior that involves the risking of money or valuables on the outcome of a game, contest or event that is partially or totally dependent upon chance. Analyzing this definition, we can see that there are two elements in the behavior that can be considered gambling. The first element is the risking of money or valuables on the outcome of a game, contest or event (risking simply means having the possibility of loss). The second element is that the event is partially or totally dependent upon chance.

Based on this definition, there appears a whole world of activities that belongs to gambling – from the low-end of risk spectrum like betting that your favorite basketball team wins the one-on-one contest with a bitter rival, to the high–end of the risk spectrum like betting on the lottery.

At the low-end of the risk spectrum, the chance of winning is one out of two, just like the outcome of a coin toss. At the high–end of the spectrum, the odds can be near-infinite. In lotto, as one official of Philippine Charity Sweepstakes Office (PCSO) recently said, “the odds are 28.9 million to one, or the chance of winning is one out of 28.9 million.”

Thus, we have here now a clear picture of the realm of gambling.

Let’s get to the definition of investment.

Benjamin Graham, US economist, Columbia University professor, originator of so-called value investing, and acknowledged mentor of the world’s greatest investor Warren Buffett, defined investment in his 1934 seminal book Security Analysis (co-written by David Dodd) as one in which, after thorough analysis, promises protection of the principal and an adequate return. I find this the best definition of investment I ever came across.

Here in this definition, there are therefore three elements for something to be called investment. First there is analysis (never mind the word thorough) involved. Second, there is the promise of protection of the principal. Third, there should be adequate return or promise thereof.

According to Graham, there has to be an analysis, meaning that there has to be some kind of study involved in the process. As a result of the study, there is promise of protection of principal and adequate return for something to be called an investment. Absent any of the three, we can say that a scheme cannot be called an investment.

Where does gambling leave us here? Does it fit in the definition? Is there a study involved in betting in lotto? Maybe, perhaps you have studied statistics in the past of winning combinations. Assuming without admitting that can be considered as “analysis”, is there a promise of protection of the principal? Of course there is none and the principal just goes down the drain as surely as night follows day. Or promise of adequate return? Again, there is none – there is just wistful thinking of winning the prized pot.

With above points in mind, the converse question of whether investment is gambling becomes a no-brainer. Investment is simply investment and gambling is gambling. Period.

Peter Lynch, arguably the greatest mutual fund manager of all time who wrote the runaway national bestseller One Up On Wall Street (a “must-read’ for all serious students in stock investment), once said and I quote, “Investment is gamble that you have managed to tilt the odds in your favor”.

Well, the good news is that at the low-end of the risk spectrum when the odds are two to one, gambling looks pretty close to investment. And if you can tilt the odds in your favor or they are just inherently so, like betting that Pacquiao would win against Mosley in May 2011, it may partake of the nature of investment.

Because you made some research from unconventional sources and know that Pacquiao has some kind of superhuman powers and is practically undefeatable in the ring (as the defeated opponent David Diaz seem to suggest when he once asked Pacquiao if he is human, for he could not see the punches coming his way), then your gamble partakes the nature of investment.

The bad news is that at the high–end of the risk spectrum, gambling is simply gambling. One in 28.9 million is close to zero. That’s where it is, whichever way we slice it.

That is what it is folks – gambling is not investment and investment is not gambling.

Now, you may ask whether I bet in lotto or in any game of chance. Well, generally no. But sometimes, very seldom, yes… that’s whenever I dream of a number, but that should be for another posting in the far future.