Busting the Myth: Investing vs Gambling

Bryce: [00:00:27] Welcome to get started investing in a podcast where we help you learn to invest in 15 minutes or less. Each episode we take one real world business story and apply a key investing lesson to help you build your investor toolkit. If you are joining us for the very first time, welcome. We strongly recommend that you scroll up and start at episode number one. Now, while we are licenced, we are not aware of your personal circumstances. All information on this show is for education and entertainment purposes. Any advice is general advice only. With that said, let's crack on. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:01:00] I'm very good, Bryce. Just adjusting everything. You're forgetting my licence. I'm forgetting how a microphone works where we're starting. Well, today, yes. 

Bryce: [00:01:08] We're getting towards Christmas.

Alec: [00:01:10] Yes, yes.

Bryce: [00:01:11] That countdown stage. 

Alec: [00:01:12] They say in Australia after the Melbourne Cup, it's downhill from there. Okay. 

Bryce: [00:01:17] And I'm downhill, we're heading towards summer. 

Alec: [00:01:21] Yeah. Like your productivity goes downhill, your motivation goes downhill. 

Bryce: [00:01:26] Your investing returns hopefully don't go downhill. 

Alec: [00:01:30] Melbourne Cup was this week as we record next week as we release and I feel like we're on the downside let's be 50.

Audio Clip: [00:01:39] Led by two lakes market. He is Dobell, Lynton Crosby and don't trip down.

Bryce: [00:01:44] Well, speaking of Melbourne Cup rain, that is what has triggered the thought for this episode. And we're going to debunk one of Australia's most common phrases that investing is like gambling. 

Alec: [00:01:56] I don't think it's unique to Australia.

Bryce: [00:01:58] Faecal Yeah. 

Alec: [00:01:59] Yeah. 

Bryce: [00:02:00] A global saying. For those that aren't invested in the stock market, one of the most common reasons for those not investing is that, oh, but it's just too much like gambling. And the Melbourne Cup is the news for those that don't live in Australia. The Melbourne Cup is Australia's largest or most famous horse race. 

Alec: [00:02:18] Though both. 

Bryce: [00:02:19] Largest and most famous. 

Alec: [00:02:20] Is Everest now the richest? 

Bryce: [00:02:21] It's the richest ever. But I think the Melbourne Cup is known to stop the nation. Yes, yes. So we've taken that story. We're going to have a look at some of the big numbers that come out of the Melbourne Cup in terms of gambling and then provide the lesson that investing is not like gambling and give a few reasons as to why. 

Alec: [00:02:38] Yeah, if you're at the pub, if you're at a family lunch, if you're at an extended family Christmas and you hear someone say Investing is just like gambling, you have to be lucky or, you know, it's just too risky. This will be your ultimate rebuttal. But let's start by talking about the news of the week, which is that Australia has a gambling problem. 

Bryce: [00:03:02] Yes. 

Alec: [00:03:02] Yes. According to the Australian Institute of Health and Welfare, a government agency, Australia loses the most per capita gambling from 2018 2019. We lost approximately 25 billion on legal forms of gambling, which represents the largest per capita loss in the world, which I was really surprised by. For some reason I thought maybe like China or maybe from a per capita perspective, maybe like Monaco or, you know, some. Yeah. Anyway, I was surprised.

Bryce: [00:03:35] Yeah, I wasn't. 

Alec: [00:03:37] Americans love to punt, but a lot of the gambling is still illegal. Yeah. Yeah. 

Bryce: [00:03:42] Big money, big dollars. Ren. Let's take a look at some of the numbers that did come out of how much we gambled across the Melbourne Cup. Three quarters of $1,000,000,000 was wagered on races across the four day carnival. Now the Melbourne Cup is one race but it is an event down in Victoria. Horses are run over four days. Yeah. So 250 million. 

Alec: [00:04:04] Well, no. 750.

Bryce: [00:04:05] Sorry. 

Alec: [00:04:05] 759 2021 numbers 2022 aren't out yet but 2021 numbers $724 million bet across the four day carnival $224 million bet on just race seven at Flemington, the Melbourne Cup. 

Bryce: [00:04:22] It's unbelievable. 

Alec: [00:04:23] It's unbelievable. Well, I know it. Well, I believe it, but. 

Bryce: [00:04:26] It's just staggering figures. $224 million put through a horse race. No wonder that we are classified as the biggest country for gamblers per capita. 

Alec: [00:04:37] Biggest countries with losses.

Bryce: [00:04:39] Losses, losses. 

Alec: [00:04:40] We just need to be better. 

Bryce: [00:04:42] Yeah, that's true. 

Alec: [00:04:44] So are nine years ago, 2012 or ten years ago, 2012, we did $150 million. We bet $150 million on the Melbourne Cup 2021. Nine years later we bet $224 million. So that's growing at 5% a year, even though I guess the interest in the Cup perhaps is waning a little bit. 

Bryce: [00:05:05] Yeah, not to the cup. 

Alec: [00:05:07] Yeah. Anyway, let's say not to gambling and get on with the lesson of the day because we're going to try and do this in 15 minutes. Yes. Investing is like gambling wrong. One of the most common things we'll hear from people who don't invest. And it's not. And we're going to prove that in the next 10 minutes. But let's start with why people think that. 

Bryce: [00:05:27] Why people think investing is like gambling. Well, people just say it as you're putting your money on something that you have zero control over. And the ability to win or lose feels like the same as the ability to win or lose in gambling is often how I think people say that they think about stocks. Yeah, you just it's just like going to the casino and putting your money on red or black. You have no control of the outcome. It's just luck. 

Alec: [00:05:55] Yeah. In its simplest form, you're putting money onto something. There's an element of risk and you're hoping to get more money back. From an element's perspective, it looks similar, but we've got four key reasons why it's not the case. And then as we were preparing, we've just started putting multiple bonus reasons in, so we'll get to them. But Bryce, why is investing not like gambling? Reason number one. 

Bryce: [00:06:22] And reason number one is your expected return when you gamble over a long enough time horizon. You will eventually lose all of your money. Always has. Always wins. Always. 

Alec: [00:06:34] And so eventually lose all of your money because the house has an edge. Even if it's a 1% edge, that's 51% of the time the House wins over a long enough time horizon. 

Bryce: [00:06:47] We got to stress that as well, because the argument here will be, Oh, that's bullshit, but I'm very. 

Alec: [00:06:51] Lucky no one can respond to us on the board. True. A long enough time horizon. 100 years. 40 years for some games. 40 minutes. You'll lose all your money. 

Bryce: [00:07:02] Yes, yes. What do you mean? So that is number one. You will expected return. But the flipside. 

Alec: [00:07:08] So you're expected return gambling in general is negative over a long enough time horizon. It's zero. Like you'll lose everything. It's -100%. Your expected return in investing is not. Your expected return is positive. Yeah. And whilst past performance is no indicator of future performance, all of that, there's no fixed odds like gambling. So you can't calculate it mathematically. But you can look historically and say that your expected return is positive based on history. That's reason one, but more importantly, your expected return is positive because of what you are investing in. And when you are investing, you're investing in the stock market. You're buying an ownership stake in a company, and you are all of the people that work for the company are going to work to make you more money. It's a fundamentally different proposition than when you're gambling. Yeah. Even if it looks the same in terms of putting money into something element of risk and expecting more money in the future.

Bryce: [00:08:10] Yeah. A stat that I like to remind myself as well is when we're thinking about expected returns. If you take the ASX over the last hundred years, there isn't a single 20 year period that you would have started investing and over that 20 years at the end of it you would have lost money. That there isn't a 20 year period where you will find that you have come out on the negative. 

Alec: [00:08:32] There you go. So you could say your expected return when you're gambling over a 20 year period is negative. You're expected return when you're investing in the stock market is positive. Yeah. Based on a history. Yes. So that's reason number one, your expected return. There is a bias for returns in investing and there is a bias for loss in gambling. Take me to reason number two. 

Bryce: [00:08:54] Right. And reason number two is it's not zero sum. So what do we mean by that when you go to the casino and put money down? If you win, I'm taking your money.

Alec: [00:09:05] Or the casino or the. 

Bryce: [00:09:06] Casino's money. 

Alec: [00:09:07] And more likely than not, if you're gambling, the casino is taking your money. Yeah. 

Bryce: [00:09:11] Yeah. So it's just a transfer of dollar for dollar between casino and playa, playa and casino. So that's what we call a zero sum game. There's no wealth creation here. There's no value added. It's just money in, money out. Yeah. 

Alec: [00:09:26] There's a fixed pool of money. That gamble is brought into a casino. Well there's a fixed pool of money. Yeah. In a game. Whereas in the stock market it's different. The pie grows. Yeah, there are wealth creation effects and as the global economy gets more productive and you know, there's more people working and the pie is growing, the stock market then grows and you it's actually not zero sum. It's positive. 

Bryce: [00:09:56] So yeah, it's positive. It's great for society's wealth creation.

Alec: [00:10:01] Yeah, you could argue that. But.

Bryce: [00:10:05] But that is, that's, that's number two but it's not zero sum. Yeah, it's a positive sum for investors involved. Round number three. What have we got? 

Alec: [00:10:15] Real risk is not absolute. So when you're gambling, it's binary in most games. But think about putting a bet on a horse given we're talking about the Melbourne Cup or putting money into a pokie, you wager a set amount of money anyway to lose that money or you win. You know, every time you spin the pokies, that money's gone or you win something, it's. It's a lot more binary. Yeah. 

Bryce: [00:10:40] Investing is although there are instances where. What did you what did one of the teams try to do for the Melbourne Cup where it was like you choose six horses for the top four and you could have still lost money even if you got the bet, right? 

Alec: [00:10:55] Yeah, yeah. But, like still the money that you wager is then in the system. Yeah. You either. Yeah. You, your risk is absolute because that money's gone and like, don't tell me that Sportsbet now offers cash because, like, that's an exception. But like in general gambling, you put your money in and then you let it ride. Whereas investing, you put your money in and you can take it out as you go. So for most forms of gambling, your risk, your risk is 100% like what you put in is then in play anyway, the win or you lose 100%. But if you're wrong as an investor, you can pull your money out at any time you can sell and so you can realise you're wrong and get 80% of your money back. So the risk is less absolute when you're investing. 

Bryce: [00:11:43] Yeah. It's not like I can put down 20 on blackjack and then halfway through try and pull ten out. 

Alec: [00:11:48] Well, hold on. You don't put.

Bryce: [00:11:50] Ten, you put like 20 on like a number. 

Alec: [00:11:52] No, you're thinking of roulette. Roulette. But yeah, same with blackjack. Like when you put, when the, before they deal the hand you put, you put money there, then you get your hand and you got to win the hand. Yeah, well that money's gone. Yeah. 

Bryce: [00:12:07] Nice. So just to recap, we've got there if you have to think about your expected return. It is not a zero sum and risk is not absolute. Yes. Now for the threat.

Alec: [00:12:20] Investing. Your upside is unlimited. Yeah. Yeah. So you bet on gold to win the Melbourne Cup? I don't know what it was paying, but let's say it was 10 to 1 odds. You put ten bucks on, you win 100 bucks, the odds are fixed. Or if you're playing poker, it's the money on the table. It's what everyone else has. That's the part. That's the money that you can win. Your upside is fixed in investing. Your upside is unlimited. You take that ten bucks that you were going to put on Gold Trip and you put it on a company. I mean, that money compounds over time. It's. It's interesting.

Bryce: [00:12:58] Yeah. 

Alec: [00:12:59] Love it. That ten bucks. I mean, if you nailed the investment, it could be anything.

Bryce: [00:13:04] It could be. And there's plenty of examples throughout history where putting $10 on Amazon when it was $2 nets you millions of dollars. 

Alec: [00:13:12] Yeah. Yeah. 

Bryce: [00:13:13] Years later, there was. 

Alec: [00:13:14] A guy that went all in on Tesla about five years ago, three years later, retired. 

Bryce: [00:13:19] Wow. They showed me a gambler who's done that well. 

Alec: [00:13:23] And I think so. So obviously like that. That's really exciting. Your upside is unlimited. Like, that's great. But there's also a really important point underneath that, which means you need to be right less. 

Bryce: [00:13:35] Yeah. 

Alec: [00:13:35] So if you're right a couple of times as an investor and you just let that thing ride, you're good. But if you put if you back the truck up and put all your money on gold trip to win the Melbourne Cup and you're right, that's great. But your upside is capped. It's not going to keep compounding. You can't ride that one correct. 

Bryce: [00:13:54] Call to retirement. Yeah. 

Alec: [00:13:56] You got to come up next year and pick the next Melbourne Cup winner and you're not going to do it twice. So but you know, old mate who retired with one correct call on Tesla or there was a generation of fund managers that became wealthy and built huge businesses by being right about like Apple, Amazon, Microsoft in the mid 2000. You don't have to be right that often as an investor because when you write, your upside is unlimited. Yeah. 

Bryce: [00:14:22] Well, right. I'm conscious we are getting too close to our 15 minutes. So those are the main four if you're at the baby across Christmas time and someone saying investing is just like gambling, you can discuss your expected return. It's not zero sum risk is not absolute and in investing your upside is unlimited. But we have two quick bonuses to close out. If that is not enough to convince your friends to start investing. Ran the fifth bonus. 

Alec: [00:14:45] Is well the first bonus. The fifth raise and investing losses are tax deductible. Gambling losses are not. 

Bryce: [00:14:52] Yes. Do you want to elaborate? 

Alec: [00:14:54] I think that's all we need to say. And what's the final bonus? 

Bryce: [00:14:57] Well, I feel like investing is actually getting smarter by engaging in investing rather than gambling. 

Alec: [00:15:03] Yeah. Okay. So you put this in and I was like, someone would probably be like, well, if I play a lot of poker, I get better at poker. 

Bryce: [00:15:09] Yeah, that's fair. You may be getting better at poker, but investing. I'm getting better at understanding multiple industries. Money management, behavioural psychology. Yeah, like plenty, plenty of things. There's plenty of things that go into it. 

Alec: [00:15:24] Like we're about testing. We're about to do an episode on Equity Mates where we're going to talk about, you know, the paper and packaging industry. We're going to talk about the airline industry and we're going to talk about one of Australia's biggest banks. Exactly like you. You get a really broad understanding of the economy and the people moving it. And yeah, you don't get that by being really good at poker. 

Bryce: [00:15:46] No. 

Alec: [00:15:46] Yeah. Although I would love to be really good to poker. Not. 

Bryce: [00:15:49] Yeah, sure. Well, and let's leave it there. Those are four easy reasons that you can argue against your mates if they do say investing is just like gambling. And a quick bonus couple bonus at the end there as well. 

Alec: [00:16:00] And so the toolkit lesson are those reasons, but it's also the knowledge that next year when the Melbourne Cup comes along, take whatever you're going to put on the horses and put it in the stock market instead. 

Bryce: [00:16:12] Nice general advice only, but we will leave it there and pick it up next week. Sounds good.