The distinction between gambling and investing is often blurred in public discourse, yet these pursuits are fundamentally distinct. At first glance, both appear to involve risk-taking, potential for financial gain and an element of chance. However, a closer inspection reveals that equating the two undermines the strategic nature of investing and misconstrues the essence of gambling.
Gambling, at its core, is a zero-sum game. For every winner, there must be a loser. Whether at a roulette wheel or a poker table, the outcomes are determined by randomness or the relative skill of competitors. The gambler willingly embraces uncertainty, often relying on luck to achieve favourable outcomes.
The house edge, a built-in advantage for the casino, inevitably ensures that most players will incur losses over time. Malta has one of the most beneficial regimes for gambling companies as it allows a return-to-player rate of 85%, which effectively means an average loss of 15% for gamblers.
In contrast, investing represents capital allocation to productive assets, expecting to generate returns over time. It is underpinned by research, analysis and understanding of economic forces. Unlike a gambler, an investor seeks to mitigate risk through diversification, valuation assessments and long-term planning. Investing embraces uncertainty, but it does so in a manner grounded in rationality and informed decision-making.
We live in a world where gambling is often easier than investing
Motivation also sets the two activities apart. Gambling frequently offers an escapist thrill, a chance to defy the odds and achieve an immediate windfall. In contrast, investing is inherently purposeful, driven by goals such as wealth preservation, retirement planning or funding future endeavours. The timeline is measured in years, if not decades, reflecting the patient nature of capital growth and harnessing the power of compound investing. Investors harness the exponential growth potential of compounding by continuously reinvesting the returns on their initial investment over long periods.
According to 2017 MGA data, around 52.8% of the population aged 18 and over are estimated to have spent, on average, €11.30 per week on some form of gaming activity. Over 30 years, the financial outcomes of gambling versus investing €11.30 weekly highlight a striking difference. A gambler betting this amount weekly on a slot machine with a return-to-player rate of 85% would wager a total of €17,628 but recover only €14,984, resulting in a loss of €2,644.
In contrast, an individual investing the same €11.30 weekly in a diversified portfolio compounding at an annual return of 5% would amass €40,879, while a 10% annual return would yield €111,807. These figures demonstrate the wealth-destructive nature of gambling and the transformative power of consistent, long-term investing.
Yet, we live in a world where gambling is often easier than investing. Opening a gambling account is as effortless as downloading an app, while investing accounts require rigorous identification checks, documentation and compliance processes. Ironically, regulators seem more stringent with investment companies than those in the gambling industry.
The latter also enjoy tax advantages as they leverage favourable regimes to bolster their bottom lines. This regulatory imbalance inadvertently tilts the playing field, making gambling more accessible and lucrative for operators than responsible investing.
The lines occasionally blur despite these distinctions, especially when speculative investments masquerade as sound financial decisions. Trading on margin, cryptocurrency speculation or engaging in high-frequency trading can exhibit gambling-like characteristics if not approached with caution and insight.
Here, the intent and methodology become pivotal. An individual investing in a volatile market without proper research may indeed veer into the realm of gambling. Conversely, a disciplined approach to speculative assets, supported by research and risk management, retains the essence of investment.
As society grapples with the intricacies of financial decision-making, distinguishing gambling from investing cannot be overstated. Gambling is a pursuit of fleeting fortune, relying on chance and often culminating in financial loss. On the other hand, investing is a methodical long-term journey towards wealth creation, built on research, foresight and the power of compounding.
Gambling can lead to financial hardship and lost opportunities, while investing offers the potential for a higher standard of living during retirement.
Gilbert Abela is an equity analyst at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.