Forum Archive Index - March 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Jim,

> 
>Hey! Look,all you antigamblers.  Do you really expect me to believe
>that your activities on the markets aren't another form of gambling? 
>That you are 'investing in a sure thing'.     Yeah, Right.
> 

The definitions of gambling, investing and speculating have been 
corrupted by marketing men so much, sometimes it is hard to have a 
firm idea of what they do mean.   I couldn't give you a definitive 
definition in the colloquial sense, but in a 'financial/mathematical' 
sense I feel the meaning of all three is quite distinct.


1/ Gambling:  Over the long term any expected return is negative, 
because the house is always taking money 'out of the pot'.    Note that 
this definition does not prevent you from having short term wins (which 
may be very large) along your journey.   e.g.  Lotto, Slot machines.
Main distinguishing characteristic:  your returns come from a 
decreasing pool of money.


2/ Speculation:  Over the long term any expected return is zero 
(excluding transaction costs).   Any transaction where you are trying to 
out think the other guy which means that if you 'win' on a transaction 
while someone else 'loses' an equal amount, is speculation.  e.g. share 
trading where dividends are ignored, or trading in shares of companies 
that have no earnings at all, currency trading or a game of poker with 
your mates.
Main distinguishing characteristic:  your returns come from a fixed pool 
of money.


3/ Investing:  Over the long term any expected return is positive.  This 
means you must be buying into an underlying income stream.  It could 
be a property from which you can earn rent, or a share from which you 
get a share of the earnings stream, or a term deposit at the bank.
Main distinguishing characteristic:  Your returns come from an 
increasing pool of money.

When I use the term 'expected return'  above, I mean that in the 
statistical definition of the word, based on the laws of probabilities.  
That means if you carry on long enough with the activity, then the long 
term result *is* a sure thing.    It doesn't mean there will not be humps 
and bumps along your path.     

So to Jim I say, yes investing *is* a sure thing.  It is not gambling.  But I 
would add the rider that people who speculate on the stock market are 
not investors.  I don't write that in any demeaning sense.    There are 
successful traders out there.  But unless they make their decisions with 
regard to underlying income streams they are not investors, by 
definition.

SNOOPY




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