An article in the paper this week & subsequent letters to the paper have got me thinking –
Is investing in the stock market a form of gambling???
a girl who speaks
An article in the paper this week & subsequent letters to the paper have got me thinking –
Is investing in the stock market a form of gambling???
a girl who speaks 
hardly. In the long-run it’s a “safe bet” as opposed to an open flutter.
Thinking a little deeper, it is a classic component of capitalism – we invest in companies to share in their profits. If people didn’t do it then there wouldn’t be an capital for those companies to work with and it would all grind to a halt.
So “safe” is it, that our superannuation funds (rightly) invest heavily in the markets.
however,
what the Diocese did (and many others with them last year and the year before) is borrow to further invest. This is called “gearing up”. When the market collapsed the value of their investments purchased with the loans dropped below the amount that they owed on those loans and the banks, rightly, called in the debts.
I wouldn’t call that “gambling” but it was, perhaps, an unwise overexposure to the market.
“In the long-run it’s a “safe bet” as opposed to an open flutter”
so… its not gambling because the odds are better??
isn’t there a chance that we look like hypocrites if we voice opinion against gambling?
yes, it’s not gambling because the odds are better. Or, more accurately, the returns and correctly matched to the volatility of the investment.
All investment makes an assessment of the payoff between volatility and return. Typically, investors will want a larger return for an investment that has a higher volatility. eg you’re going to want less % returns on government debt (which is basically low risk, whoever heard of a major government defaulting on debt?) compared to “Joe Whizz Brand New Tech Company” (which could have any number of possible outcomes, belly-up in the first week or millionaire in the next month).
So the wise investor makes a considered call, and will also purchase a number of slightly more risky investments in order to diversify the risk away (and clever maths shows us how that works).
Which is a million miles away from going to the Casino, or sitting at the pokies, and plugging away there. In those situations the volatility of returns is massive. Most lose, occassionally someone hits the jackpot. It becomes “gambling” when you reach that moment.
So did the Diocese “gamble”? Some might want to argue that borrowing to invest was increasing volatility. But to the extent of “gambling”? Personally, I don’t think so.
ok – so i get that its different from pokies etc. but then how is it different than betting on horses?
hmmm, well there are some differences.
When you bet on horses you get odds on each horse, so there’s some measure of controlling and assessing the risks, or at least a larger variety of risks that you can expose yourself to.
I wonder if the difference is not so much in the nature of the bet but the reason for betting? For example, one of the sites I subscribe to is Political Betting. It’s run by a guy who makes his living out of betting on politics and similar areas. He mostly bets spreadbets and uses his personal assessment of the future political outcomes to earn a monthly wage! It’s not so much “greed” that motivates him as simply an interest in the issues and an awareness that he can earn his living from it. When you read his discussions he speaks about how he has so many positions open, which ones he might “close off” to maximise gains or minimise losses and so on. It’s really like anyone investing in other assets.
but another punter can come along and bet on exactly the same bets but with a completely different motivation. This punter thinks they can “get rich quick”. so they stake lots on a single high risk bet. And that’s just stupid.
Same bets, different motivations. And that, perhaps, is the important distinction.
So then we can turn to the Diocese and ask “what were you thinking when you geared up to invest further?”
hmm i get what your saying and i don’t disagree with it but i’m not convince by it either
investing in the share market can be like gambling but is not under all circumstances.
in addition to david’s comments about investing in companies who make stuff and give people jobs, there is a further difference in how gambling (in games of chance) and share markets let people to win or lose money.
In both cases you stand to make money by taking a risk. The bigger the risk the bigger the gain/loss and so on.
This is why gambling and share market investment can appear to be the same thing. but think about where risk comes from in each case:
For gambling the risk arises from the game’s existence. in fact the game’s only purpose is to create risk so people can win and lose money.
For a capitalist economy risk arises from carrying on an enterprise or some other similar activity. Businesses exist for all sorts of other reasons but with them is always associated some risk and someone has to assume it! Either the owner of the enterprise will assume it or the owner might choose to offer some of the risk to others via, say, the sharemarket. If you chose to buy a share you assume the risk that someone else would have had to otherwise.
It is the artificiality of gambling that makes it what it is – en exercise where the only objective is gain by greed.
For investment in shares there is an element of risk involved but you’re not playing a game…you’re becoming a part-owner in a business and with owning a bit of that business you stand to gain or lose. it’s risky!
Perhaps a simpler way to put it: Do you think it is wrong to own a business? Investing in shares is essentially the same thing. just you own a smaller chunk and lots of others own a chunk too.
However all i’ve said just points out a theoretical difference. Some people still treat the share market like a game of poker.
as an aside…it also raises the question: do i really want to be an ‘owner’ of that business? would i sell what it’s selling? etc.
thanks reuben – that’s helpful