First published in The Sunday Times on 20th August 2017.
What is the difference between investment, speculation and gambling? And does it matter?
There are some who believe that the entire stock market is merely a casino, and that it fulfils no productive purpose either for industry or society.
This view is a little extreme, but there is no doubt that betting and investing are both risky undertakings, involving wagering on uncertain future outcomes. And many traders who work in the City enjoy betting in their spare time, be it on shares, horses or football. After all, the Cheltenham Festival, racing’s most lucrative week, is dominated by those who work in the Square Mile.
For many, it seems that the activities of investment, speculation and gambling are indeed a continuum.
I am something of a purist, however: I do not enjoy gambling except when I am the house — and then it is a business operation. I have owned bingo clubs, bookmakers, slot machine arcades and greyhound tracks, and I think there is a very significant difference between venturing capital on a commercial undertaking, and simply betting on games and sports.
At heart, I like to believe that risking money by backing a company is a question of effort and skill. I need facts about form and odds — what investors call due diligence. I take longer-term bets, try to reduce the downside and prefer an active involvement in the business.
By contrast, gambling is about chance — and beating the house, which is tough because the odds are stacked against the punter. Moreover, investing in businesses creates jobs and grows the economy, whereas gambling is a zero sum activity with no underlying meaning or output save recreation.
A good primer on the subject of betting is the book Squares & Sharps, Suckers & Sharks, by Joseph Buchdahl. The subtitle is The Science, Psychology & Philosophy of Gambling.
Buchdahl explains that an intelligent gambler understands probability, regression to the mean, the law of large numbers, and that sequential wagers represent a “memory-less” Markov chain, where past outcomes have no relevance. The clever gambler also knows about the fallacy of small samples, or the peril of generalising expected success from a few wagers. He or she does not believe in winning streaks, and knows that the pain of losing is much greater than the pleasure derived from winning.
I’m always surprised when tycoons gamble at casinos — I suppose they do it as a form of escapism, or entertainment. I get enough thrills from my day job.
Mind you, I am probably a compulsive capitalist, even if not a gambler. I can’t resist attractive opportunities, even when I probably should.
America has always had an appetite for high-risk finance, which surely ranks as speculation — and that aspect of its culture is part of the reason it has been so successful economically. For example, Tesla, the electric car maker, has raised $13bn (£10bn) in debt and equity but has yet to make a profit.
Stuart Banner’s book Speculation — A History of the Fine Line between Gambling and Investing describes how the United States was built on booms and busts. From land, to railroads, to agricultural commodities, to oil exploration — to trusts, to conglomerates, to merger and acquisition mania — each age has its favourite speculative bubble. Yet these regular frenzies of speculation have produced remarkable innovations, wealth generation and material advances.
America is unique in its conspicuous enthusiasm for new technology and the capacity to fund its development. By contrast, countries where assets rarely change hands, where industry and bankers are cautious, and where investors prefer bonds over equities, are unlikely to grow much — or to offer moral and financial support to entrepreneurs.
Some believe that science and mathematics can enable lottery, roulette or poker players to beat the system. Adam Kucharski argues as much in his book The Perfect Bet.
But I am very doubtful it is worth the effort such an achievement would require.
All that time and brain power could be applied so much more usefully elsewhere in society.
To a degree, all of us who risk our fortunes trying to predict the future are fantasists — be we gamblers or investors. We like to think we can control our destiny, which is, of course, impossible. The best one can hope for is to influence it somewhat.
Yet it is easier to navigate the randomness of life if you are used to weighing probabilities, and are comfortable with judging unknown outcomes.
I’m afraid that those who need to be sure about everything are doomed to an unhappy and stunted existence. I would rather rank among the plungers, be they investors, speculators or gamblers.