[Welcome to the fifth installment of our gambling/investing series. Just in case you missed them, you can still read Part One, Part Two, Part Three and Part Four]

Let’s look a few more of arguments made in support of the notion that gambling and investing are not similar.  Again, I think you’ll find that the two practices share more in common than many would like to admit.

Mathematical Expectations. Many investors go out of their way to avoid any association with gamblers.  Sometimes, they’re making valid arguments.  Sometimes, they’re claiming that “mathematical expectations” differentiate the two pursuits.  That isn’t a compelling position.

Financial Mentor makes the argument:

Gambling and investing are both games of chance. Both involve probabilities where you put money at risk with the hope of a return, and both can make your hard earned savings vanish when you bet wrong.

So what is the difference between gambling and investing, and why should you care?

The difference boils down to one simple concept that sounds intimidating but is actually easy to understand – mathematical expectation.

That sounds good and it certainly puts investment in a positive light.  The problem?  It’s not really true.

The argument basically maintains that the difference between investment and gambling is the fact (and it is, admittedly, a fact) that a smart investor acting on the best possible information has a significant “edge” over the gambler.

That’s not a distinction between gambling and investing, though.  It’s a distinction between different gambling options based on the odds.

Would you believe that blackjack is not a form of gambling because it offers a greater chance of winning than does a stay at the craps table?  Of course not.  Both are gambles.  So was your latest stock purchase.

The fact that good investment has a much greater likelihood of creating better results doesn’t somehow divorce it from the world of gambling.  It just makes it a better bet.  And it remains a bet because even the wisest investor is at risk.  If we’ve learned anything over the past few months, it’s the fact that even sane, conservative, well-planned investment strategies can stink the joint up like a bad beat on the river at a hold ‘em table.

Time. Investing is long term.  Gambling is short term.  That’s a common position held by those who don’t think the two pursuits share a great deal in common.  Matt Krantz outlined the argument in USA Today:

Investing is slower. You hope to double or triple your money, but over decades, not minutes or hours. This is possible by investing your money in companies that increase prices and profits steadily over time and return cash to investors.

The problems with this perspective?

First, it chooses to evaluate gambling as singular events and investments as a whole.  Gamblers may opt to be in it for the “long haul”, making certain bets or engaging in certain behaviors over an extended time.

Second, it wrongly argues that investors are only interested in long positions.  How long do you have to hold a stock to qualify as an investor, we might wonder.

Third, the time distinction is arbitrary.  It doesn’t address the core motivations and mathematical underpinnings of either gambling or investment.  It’s a straw grasp, trying to force a distinction artificially where none really exists.

Luck vs. Skill. This is probably the most common (and most self-serving) arguments investors offer as proof that they’re not gamblers.  Don Luskin echoes the common sentiment in Capitalism Magazine:

The central idea that separates gambling from serious investing or trading can be discovered in the old saying, “I’d rather be lucky than smart.” The essential distinction is that gambling isn’t smart, and depends entirely on being lucky — while investing depends on being smart (but being lucky never hurts).

Luskin concedes that luck has some role in investment outcomes, but he still maintains that the dividing line is the “fact” that gambling is an inherently luck-based activity.

That represents a serious misunderstanding of gambling.  Sure, there are those who slide a twenty into a slot machine and hope for the best.  Those people are operating from a purely luck-based perspective.  But what about the poker player who’s honed her skills for decades?  What about the sports bettor or race handicapper that studies events, just waiting for the right opportunity to make a move?  Hey, we can even toss in the weekend blackjack player who took the time to learn basic strategy.

These gamblers are not operating purely from a luck-based model.  Yes, luck will play a role in their success, but luck can make the difference between a windfall and whether that hurricane barely misses the housing development into which you just sunk $150K, too.

The arguments trying to separate gambling from investing are usually rather superficial.  They look for ways to distinguish the two for the sake of convenience, rather than based on the actual decision making involved shared in both processes.

HOWEVER…  And you’ll notice that was capitalized…

Investing is probably the best possible form of gambling…  We’ll discuss why tomorrow.