Warren Buffet’s secret to succeeding in Wall Street is simple. “…try to be greedy when others are fearful and try to be fearful when others are greedy.” And sure, Buffet is the king of Wall Street. His ingenious art of speculation earned him a net worth big enough to be the richest man in the world for many years.
Despite this, most market traders speculate year after year to no avail. In fact, many traders lose more money than they earn. Like gamblers, their efforts at speculation bears little fruits. So, is speculation among investors the same as gambling? If not, what are the differences?
Time Frame of Expected Gains
Most gamblers expect results immediately. Whether it’s a game of blackjack or sports betting, players wager knowing they will have results soon. By comparison, speculators don’t always expect immediate gains.
Think of farmers. They plant corn expecting there will be demand for their crops six months afterward. No one is ever sure whether this will be true or not. But they cultivate, weed and invest in their farms until harvest time arrives. That’s speculation.
According to Buffet, a good way to differentiate speculation from gambling, in this case, is that farmers can lock profits before harvest time. In casinos, a bet is rarely altered. Once you back the ball to land on a red pocket in roulette, there is no way out.
Long term Returns
Even pathological gamblers understand this. In betting, you win or lose. And the more you gamble, the more likely you lose. Speculation is different. There is risk involved and winning is never guaranteed but speculators have always found ways to make profits in the long term.
Casinos do everything to make profits off gamblers’ money. They place a house edge in every game, remove clocks off the walls and reward players for small wins every time. In return, gamblers play more than they should and leave most of their money in the casino.
Of course, not all manner of speculation leads to overall gains. In day trading, speculating price movements within minutes is often too similar to gambling. There is little data to tell you which way the market moves at times, leaving you to gamble your trades.
Role of Chance
Chance is certainly an important factor when speculating and gambling things. But there is a big difference in how it affects the two financial tools. When speculating, chance is fairly or highly important.
If there is no chance of making profits, why even speculate? Gambling also involves betting on things with a high chance of happening. But at times though, people do gamble on things with very little chances of happening.
Imagine betting that either goalkeeper in a football match scores the first goal. It could happen (maybe a penalty) but the chances of it happening are low.
You can’t speculate something that will never happen. In investing, you either speculate market movements or items bound to happen. In gambling, it’s not necessary that what something predicts happens.
Let’s say you gamble on which player gets booked first in a football match. There are 22 players and anyone could get booked. But saying the goalie gets booked first is a long shot that may not happen. By comparison, speculating that the South African and will gain value after oil was discovered there either will happen or not.
Simply put, the outcome is definitive when speculating. It’s also guaranteed when playing many newcasinos.com games. But in certain sports betting wagers, like props, the outcome could or could not happen.
Depending on who you ask, speculation is done for many reasons. Some speculate market movements to better calculate the value of stocks or currencies in the future. Others speculate to invest in something and profit off their predictions. Still, there are some who use speculation to protect their long-term investments.
By comparison, gambling serves a single purpose—to make profits. Fine, gambling is also fun and evokes all kinds of emotions. But no one places their money on the line without hoping to win.
Decision Making Process
Investors crave data and spend tons of hours trying to analyze information before making any speculations. Some spend hours following business news and watching market trades. No decision is made blindly.
By comparison, research is often a non-issue when gambling. Simply log into your favorite casino account. Pick a game of choice and start playing. You could find out how to play poker or blackjack online. But there is little information that can help increase your wins.
Sure, there are lots of ideas on how to turn casino gambling into skills based games. But the reality is that most of them are pure risk gambles.
No one ever went to jail for speculation. On the other hand, people are arrested for illegal gambling all the time. The argument here is that gambling has negative social and economic effects. From problematic gambling that leads to financial disruptions, to social effects—there are many documents that show the side effects of gambling.
By comparison, there are no effects to speculating. You could speculate the US dollar to lose value in the next month but you lose nothing until you put your money on the line. Again, speculation has utility in any economy.
Not only does speculating help investors gain confidence in currencies or stocks but it also helps keep trading actively. Gambling also has economic benefits. But as already mentioned, its negative effects are often too many to warrant some countries to ban it.
Speculation and gambling are often linked to each other. And true, many speculators gamble their money by selecting trades without much due diligence. On the other hand, gamblers speculate outcomes all the time.
Still, there are lots of differences. Warren Buffet believes that if you can speculate and lock profits at some time in the future, you are not gambling. Additionally, you could speculative to earn profits in the long term. Gamblers predict things to make profits in the present. Such differences and more keep things clear that speculating and gambling are two different activities.