Are You Investing or Gambling? – the differences between betting on companies or outcomes
Marcus Schafer (00:05)
Are you investing or are you gambling? This is a question that we’re going to address today because it’s super, super important for you and us to think about every time we are investing for the future. What category is that going to fall into? This is going to be episode 17 of Green Stream where life, where logic meets life in investing. This is Pat Collins, Greenspring advisor, CEO and me.
our Director of Growth and an advisor here. So Pat, talk to me a little bit about ⁓ the differences between investing and gambling.
Pat Collins (00:44)
I gambling, I think about it fairly simplistic way. think gambling to me, I should expect to have a loss over short term and long term. Investing, I should expect to have a return over the short and the long term. Now there’s a lot of randomness in that. So it doesn’t always play out each time that you place a bet, each time that you invest in something, but that’s what I would expect. So sometimes that’s really hard for people to
figure out is whatever I’m investing is, is this more likely to lose money or make money? So think that’s what we’re gonna dig into today is how can you really determine what you’re investing in if there’s a positive expected return or that you may not make money out of it? And we’re gonna compare and contrast gambling to investing because I think a lot of people think about it the same way. They’re totally different, but there are some similarities and we’re gonna touch on each of those things.
Marcus Schafer (01:38)
Yeah, I think similarities, there’s a lot of evidence around the odds of both of success ratios for both of these categories, which enables us to help classify different types of gambling and different types of investing into categories helps us understand. That’s just super important to understand what you’re doing in a moment. And then maybe one of the big differences I think about is, and I think this actually makes it very tough.
for investors to tell the difference sometimes between the two. But gambling is very much a zero sum game, which means the pie is not expected to grow. So you kind of have this pool, think about a poker table, everybody’s around the table, the money’s fixed, and you’re kind of competing against other players with somebody out there taking some amount of money to facilitate the game. So it’s zero sum, the pie’s not growing. Investing…
is zero sum in the sense of there’s only so much investments out there, but you expect the pie to grow over time, which kind of you expect companies to produce profits and you expect those profits to be distributed to shareholders so they become more valuable over time. But that kind of judgment sometimes because it’s really tough to understand, hey, am I doing better or worse because my money is growing?
Right. So I do think that’s one of the differences and, you know, companies are cashflow producing, whereas gambling is just pure outcome, outcome based. ⁓ So that’s maybe one distinction that I draw right off the bat.
Pat Collins (03:18)
Someone once told me and it’s always stuck with me that, you know, it’s kind of gambling if you can’t lose on purpose. And I was kind of struck with me where it was one of those things where, yeah, I could go play, can I lose on purpose in roulette, for example? Not really. I mean, if I bet on black, can’t, I don’t know what’s going to happen. It’s a complete game of chance, basically. So when it’s a game of chance, you really can’t lose on purpose. Anything could happen.
I think a lot of people in the short term, would say, investing looks a lot like that. It feels like you can’t lose on purpose. I can tell you, want you to do as much research as can and I want you to pick the worst stock that you can find. It’s really hard. Those stocks can go up 50 or 100%. It’s really, really crazy how that kind of works. Now, over time that changes with investing, but in the short term, I think that’s why it’s so, I think a lot of people equate investing with gambling.
The Odds (1,2) – gambling is negative expected value, scientific investing is maximizing the odds, and speculative investing is somewhere in between
is that it looks and feels a lot like kind of the same thing that it’s a game of chance in a lot of ways. There’s a lot of randomness to it. And I think it’s really hard for someone to distinguish. And we’ll get into the odds in a little bit that there is an investing maybe in the short term. have a 52 % probability of making money if I pick a stock with gambling. Maybe I have a 47 % chance of making money, 53 % of losing.
That’s really hard to distinguish in the midst of placing a bet or investing in something, but that you just, those little things in the short term exponentially widen over time. So the more you do it, either the greater the chances that you’re going to make money or the greater the chance you’re going to lose money. So again, the odds are really, really important, but I think maybe a good place to kind of dive into this is defining the components of and framing this all. So maybe you want to talk about that?
Marcus Schafer (05:13)
You just make a great point about this law of large numbers and the first component that we think about, there’s probably three, right? There’s what are the odds of winning? What’s your payoff structure if you win or lose? And then combined, what is the expected value? And so the odds of winning for gambling is zero sum. It’s less than 50%. Right. You expect to lose as expectation.
The question is, do the odds compensate for that? It’s zero sum, so they don’t. So your expected value is negative. Investing is different in that your odds, if you do it right, are positive, which means more stocks, stock markets go up over time. So your odds of winning, positive. Payoff structure, positive. So you have a positive long-term value. And sometimes you hear it from
both sides, I don’t want to invest in the stock market because it feels like gambling. There’s definitely a positive expected value. I would not draw that association. What I think we’ll try and do today is maybe bucket the world into three categories because there’s a gray area in the middle. And so those categories would be gambling, pure negative expected value, what I’ll call speculative investing, which is it has a positive expected value, but
It’s definitely less than what I would call scientific investing, which is think index funds or styles of investing. Like we try to pursue hyper diversified following the evidence that’s kind of maximizing your odds. And hopefully what people could take away from this is there are things you could do that lower your odds of success and might turn speculative investing more into gambling. But there’s also things that you can do to increase your odds of success.
that might turn gambling into speculative investing into scientific investing. So hopefully some of that stuff will come out while we just look at different types of bets for lack of a better term and then try to categorize them.
Pat Collins (07:22)
Yeah, one of the concepts that I really like to think about from an investment standpoint is I think a lot of people understand gambling. They’ve been to a casino. They understand. make a bet. And, you know, there’s the always the adage, the house always wins. And, you know, we’re going to kind of dig into those numbers to help people understand that. But with investing, it’s just totally flipped where you become the house if you do it correctly, this scientific investing that you’re talking about. So I think hopefully, like you said, by the end of this
we’re going to talk about the practical elements of what can you do to become the house, basically. So I think where we wanted to start was sports betting. Now, I’m not much of ⁓ a gambler. I know a little bit about it, but I’m not really big into sports betting. I know it’s become a gigantic part of the economy and a lot of young people are getting into it. But maybe you want to talk a little bit about the mechanics of how sports betting works.
Marcus Schafer (08:17)
Yeah. So the mechanics, I also don’t support that. So this is all from the research we’ve done, but it’s kind of this 11 for 10 rule, which means you bet $11, you expect to win $10, right? The middleman has to get paid. When you go and you look at these companies, they tend to produce profits. They definitely generate revenue. A lot of them are heavily spending on marketing, which tells you something about their expected future profits.
Sports Betting (1,2) – favorite longshot bias and evidence of market efficiency
I think some of the most interesting things that you could take out of sports betting actually goes back to horse racing. It’s where we have a lot of the longest data. It tells you a few things. Number one, markets are incredibly efficient. people are smart, right? So they’re evaluating, hey, what horse do we think is going to win this race? Now, one of the most interesting things that comes out of that research is a bias called the favorite long shot bias.
And what this essentially is saying is that favorites actually have the best odds and long shots have the worst odds, but those are what people tend to want to gamble with. They want to take those big lottery type risks. And then actually, I think there’s a lot of connections to how you should think about investing, but that bias really comes through the research.
Pat Collins (09:47)
Yeah, I would almost equate that to the long shot being I’m going to pick this IPO stock that just came out versus the favorite is kind of an index fund that just lowers costs and owns everything. So a couple other, I guess, analogies I have with sports betting and investing. One is I think the efficiency that you’re talking about is really interesting. I’m a Philadelphia Eagles fan. So if I’m betting on the Eagles,
And they’re projected to are there. The Vegas line says that they’re supposed to win by seven points. That’s the point spread. If everybody starts betting on the Eagles because they think, my God, they’re going to win by 14. All of a sudden, the spread will widen. It doesn’t just stay static. And so I think that’s important for all of us to kind of think about is that there’s a lot of efficiency in sports betting. It’s hard to like outsmart people basically with this type of thing, just like the stock market.
When new news comes, becomes available in the stock market, prices immediately adjust. So I guess one thing, and then the other is what you talked about this kind of, I have to bet $110 to win 100. So the house is got this $10 kind of, they call it VIG in a gambling, but with investing, it’s the bid-ass spread. If I’m buying a stock,
I have to buy it at the higher price and the person who’s selling it has to sell it at the lower price and the middleman is making kind of that spread. So there’s a lot of similarities with investing in gambling and probably like both, you want that spread to be as narrow as possible. With investing, there’s things that you can do to try to narrow that spread or figure out how to kind of keep your costs as low as possible. I don’t know if you can do that as much in gambling, but anyways, I think that was an important kind of similarity.
Marcus Schafer (11:34)
Yeah. And we won’t hold rooting for the Eagles against you. It also, it tells you something incredible too, which is markets really don’t care about your emotions, what you think is going to happen, what you want to happen, right? Both in sports betting, you obviously want your Eagles to come back and win another Superbowl. They’re probably not going to do what the odds are stacked against them. Your opinion is not going to drive the price of that because somebody else is going to come in and say,
I can’t believe Pat’s willing to take this bet. I’ll take the other side. Obviously, somebody in the middle, they just want to market that. More people can do it and they can make more money in the middle. Like you say, the house is the winner. Just going on to that, you can think about casino games as a next step beyond sports betting, where the odds are less than 50%.
you’re going to win, kind of doesn’t matter what game you’re playing. There are interesting different types of games and those all have different odds. So some are more favorable than others. But when you pull the financials of MGM and SANS, looks like they’re making some money.
Behavioral Biases: Why We Gamble (2, 3, 4) – the 4 reasons we gamble
Pat Collins (12:58)
Like you said, every game you play at a casino, you should expect to lose money. And there are different odds there. One of the things that I was just kind of curious about, because again, I’m not much of a gambler. If we get to a casino, I’ll gamble a little bit. But I was always kind of curious why people would spend their money on things or almost think about invest in things that they expect to lose money on. So.
I went and did some research and if you go back and listen to our last podcast, it was around biases, behavioral biases that we have. And that’s really what kind of came out in a lot of the research I read. were like four areas that researchers have said, this is really why we think people gamble because there’s not really a rational reason why somebody would want to lose their money, basically. And they basically said, you first, you get a dopamine hit when you win.
And there is, your brain is signaling that they’re enjoying that. It’s the same reason why people take drugs or do things that make them feel good. is this, you know, kind of the brain is signaling that I like this. There’s a, there’s a good feeling and it gets people to come back. So there’s definitely this kind of, obviously there’s probably an imbalance of that for people that have gambling addictions, but this is, this is number one. Number two, there’s these.
cognitive biases around losses that the research talked about. So this idea that if you have lost three blackjack hands in a row, that you kind of say, I’m due. I’m going to bet more on this one because I should be able to make it back. I’m due to win one. The odds are completely random. There’s no reason that you are due in a casino game. It’s the exact same odds every time you play, but people have this bias that they’re due. The other thing is that
Short term wins do kind of reinforce a lot of these cognitive biases because the odds sometimes are pretty slim that, you could play 10 blackjack hands and win four and lose six kind of thing. So it’s not like you’re losing every time you are winning sometimes. And so that reinforces the gambling behavior. And then the last thing, which this is the one I kind of understand is just the entertainment purpose of it. Obviously, you’re around a lot of people. It might be entertaining. You might like the energy inside of a casino.
There’s also maybe some worse ways to think about the entertainment. There’s kind of a coping kind of thing of like, hey, this kind of gets me out of whatever I’m thinking about because I’m so engaged in this. There’s an escape kind of mentality. So I think these are all things that keep people coming back to gambling, but it also probably keeps people coming back to making bad investment decisions sometimes in that middle category that you talked about, speculative investing. It’s a lot of the same reasons when you go through them.
And again, to your point, it’s better than gambling. Speculative investing is probably better than going to the casino, but it’s so much suboptimal, so more suboptimal than what you can get if you took a scientific approach to it.
Marcus Schafer (16:00)
Yeah. And also what I found was super interesting is this concept of people just want to, they want to take risk, but they call it localized risk taking where it’s kind of like you look at a gambler or an investor, they’re taking risk in one aspect of their life, but they also own insurance. So it’s kind of like, well, why would, it’s not just like you’re a risky person, right? So there’s this mental accounting thing that also tends to happen both in investing and gambling that
Hey, I’m setting aside this amount of money. I’m going into the casino with X amount of money and I’m going to have some fun and I’m going to do this or for investing. I think about why potentially people take some speculative investing behaviors, yeah, there’s an entertainment value. There’s also this illusion of control. I was reading a study that cited in Spain, they have a lottery that’s about Christmas time called El Gordo.
and somebody won it and they interviewed him and they said, well, how’d you pick the winning number? He said, well, I dreamed of seven, seven nights in a row. So I called a bunch of these places to buy a lottery ticket and asked them if they had any tickets that had 48 in them. And that’s the illusion of control because obviously seven times seven does not equal 48. But when they looked at the increase of lotteries,
One of the things they found was that when they allowed people to pick their own numbers, obviously it’s it’s random by chance, but when they allow people to pick their own numbers, popularity took off. So there is this illusion of control that maybe is happening. And I think that’s something else that’s, that’s coming into play as well.
Pat Collins (17:49)
Great. So maybe we can like flip it a little bit to the, I would call your kind of speculative investing kind of areas. And I think the first one is around kind of day trading or really being active and kind of picking your stocks, buying and selling a lot. I think there’s some data to go through here. I did pull up one study that I thought was interesting. Surprisingly, there wasn’t a ton of data in the U S around day trading, but
Brazil, of all countries, they’re basically equivalent of the SEC, I guess, because they have access to trading accounts. Looked at this and they found it is fascinating that 97 % of day traders lost money after 300 days. So it’s this idea of this probably looks very much like gambling, but, you know, if you give it enough time and you’re making bad decisions, you’re going to lose money basically. And so again,
Why do people do it? It probably gives back to all those cognitive biases, but I thought that was a really interesting stat. you have any other thoughts on kind of day trading or active kind of stock picking?
Day Trading: The Risks of Active Investing (5, 6) – a continuum from gambling to speculative investing
Marcus Schafer (18:59)
Day trading, just to define, is obviously like you’re making trades in very short time periods. So you expect crazy high turnover. We talked about this before. The more turnover you have, actually what the research shows is less returns. Pat’s talking about a study in Brazil that confirms that. I read a study in Taiwan, what’s interesting about the study in Taiwan about day traders. They introduced legalized gambling in the form of a lottery.
way through the time period. And when they did that, they tried to control for other factors like all good researchers do. Trading volume fell 25%. So in that case, it seems to be that people were using the stock market as their form of gambling. So I think day trading to me is pretty clear. Even though stocks, you expect them to go up, I think the percentage is like 51%.
53, something like, I think it’s 51 % on any given day you expect stocks as a whole to go up. So that kind of says, okay, well, maybe that’s investing, but when you’re doing it on a daily basis, you’re incurring a lot of costs to make those trades. think that probably pushes your probability down, pushes you into gambling. I would say high volume.
trading gambling for kind of active investing. think what’s more interesting is where do we draw the line between what is gambling and what’s speculative investing? And through some of the research we’ve done in other episodes, I kind of think a few things. One of the things we’ve found is if you have 10 % or more in one individual position,
that tends to drive a lot of the volatility for the rest of your portfolio. So I would say one that tells me anything over 10%, that position is likely a gamble. It also says anything less than 10 total stocks to me would definitely fall under the line of gambling.
Pat Collins (21:14)
Yeah, it’s interesting because it’s kind of a continuum. Like you said, yeah, if you invest in one stock, that should be basically the same thing as gambling. ⁓ If you invest in 10 or 15, is that, know, when does it kind of no longer become gambling? But I think as again, we’ve talked about some studies in the past of kind of what percentage of the stock market is driven by how many stocks and things like that. And you can really understand that when you really narrow your choices, it’s like putting
your money on black in roulette or betting a lot on a blackjack hand. There’s just so much randomness to it that it’s hard to be able to say with certainty that, or with high degree of certainty that if I, as long as I stay invested for three years, five years, 10 years, there’s going be a payoff here. That’s true with the stock market is not true with a stock. And that’s important kind of way to think about gambling versus investing.
Marcus Schafer (22:07)
Yeah. The other thing that’s really hard to do is try to say compared to what, right? And I would say like active mutual funds in America compared to cash, those are investments because they’re automatically giving you certain levels of diversification for the most part. It’s only now that we’ve seen weird things like single stock ETFs would absolutely would fall into.
gambling. But when you look at the percentage of portfolios managed by others that underperform cash, it’s super low. It’s like 3%, 0.3%, something like that. And then you compare to how many stocks kind of underperform cash and more than half of individual stocks underperform. So it’s like, what’s your level of diversification I think is an important breakpoint.
But if you’re thinking about what’s the comparison if you move the benchmark up to like an index investing, that’s where I think kind of most active stock picking or bond picking kind of moves into this speculative investing component because at best you’re kind of starting with the benchmark return and then you’re working your way off of that and you’re saying, well, I got to pay fees.
Okay, well, how much are the fees? And then a lot of them use old structures, mutual fund structures to do their investing. So then you have taxes. So you have all these components that are working you away. And it’s just to me building the case that it’s much more speculative investing. Potentially another hurdle people should ask themselves is like luck versus skill, right? Hey, is this a, do I have to have skill? Do I think I’m investing in skill?
and you have to pick the active manager, which tells you you have another choice there.
Lottery Stocks and IPOs (7, 8, 9, 10) – favorite longshot bias in action
Pat Collins (24:09)
Yeah, I think that’s great. I think this is similar, but we listed it as something that feels more like speculative investing is kind of the idea of lottery stocks and IPO. So these are stocks that you can kind of think of as like penny stocks. Some people talk about them like that way where there’s just a lot of speculation that happens inside of these. So there’s a lot of underperformance as well. Maybe you want to talk a bit about like what you found with these types of investments.
Marcus Schafer (24:39)
Yeah, I think this goes back to this favorite long shot bias we talked about in the beginning, which is the favorites tend to have the better odds. And for gambling, by the way, it’s still not above 50%, right? They just have better odds and the long shots tend to have worse odds and worse payoffs, but they tend to be favored by investors. So when you try to peel back what are individual investors actually investing in, it tends to be smaller
more volatile names that exhibit a lot of the same characteristics as like a lottery. Like, hey, if you hit it, it’s going to take off. The challenge is when you look at those returns, you’re seeing the favorite long shot bias in real life. So a lot of these have underperformance. So I think there’s that aspect. These lottery stocks tend to be small, tend to not have too many profits today, but obviously you wouldn’t invest in it unless you thought they were going to be profitable in the future.
And then maybe another section that you kind of referenced was IPOs. They’ve done a bunch of research around IPOs and the way they do that is they say, let’s take this new public company and let’s compare it to companies like them that are already public. And what you see is maybe one of the only areas where I could say, hey, I actually think people are pretty good market timers is it turns out that those public, newly public companies underperform their peers.
That research has been going on for quite some time. Jay Ritter has been doing it since the early 90s. It’s pretty well documented, especially until the insiders have the ability to sell out, which is why they went public. ⁓ There we just see much more speculative investing behavior.
Pat Collins (26:27)
We were going to kind of go through maybe some of the other ⁓ investment options that people have, ones that we hear about a lot and maybe give our thoughts on whether this is gambling, speculative investing or actually scientific investing. So probably the one that’s in the news the most these days is crypto. What are your thoughts on crypto?
Cryptocurrency – if price is only based on what someone else is willing to pay, it’s gambling
Marcus Schafer (26:49)
My thoughts on crypto, you’re gonna get me in trouble. ⁓ My thoughts on crypto, does it produce cash flows? It does not. So we’re really asking ourselves, what is somebody else willing to pay? That feels like a bet to me. That’s gambling in my mind, I think is pretty straightforward.
Pat Collins (27:10)
I would agree. The distinction between crypto and maybe a few other things that we talk about and what I would consider maybe traditional investments like stocks and bonds and real estate and whatnot is that there’s something I can look at with a stock and evaluate to determine what its value should be. So it has earnings. I can look at that. It has some anticipated growth, things like that.
Crypto is tough because I’m not really sure how to value it. It has no real useful, you know, has no real use today. I think in the future it could, but it has no use today. It’s not like I’m going to use it to go buy a car because if I’m saving up in crypto or in Bitcoin to buy a car, there’s so much instability in the price. You know, the day before I went to go buy the car, I could lose 10 % of its value and all of sudden I can’t buy the car anymore.
So I think there’s still kind of, it remains to be seen. I kind of look at it similarly as currencies and maybe even the next thing we were going to talk about, which is gold. I kind of look at them all in the same way, which is, like you said, doesn’t produce any income, doesn’t grow. It is a digital asset. And for me, it’s really hard to figure out what that value is. I’m sure there’s people that will kind of…
tell us after this podcast to say, here’s how you do the value because there’s a limited supply and it’s only gonna go up. I still struggle with how it creates value over time. Anyways, that’s our take. I’m sure people have different ⁓ takes on that.
Gold – An example of how to increase the odds of success of your thesis
Marcus Schafer (28:41)
I think your component on gold, I think gold like currencies and I would call that gambling, but I would call owning gold miners, speculative investing, which is, hey, here’s a company that’s producing something. And when they produce that thing, they sell it and they receive profits that they can distribute to me as an owner. would call it speculative investing just because there’s not that many
gold mining, it’s super concentrated, it would break some of the rules that I was talking about earlier. So there, you could see within any of these categories, you might have a way to express your opinion, but do so in a way that is tilting the odds in your success. then if you go all the way to our scientific investing, how you would express that view is you would say,
Well, since they make profits, I still want them in my portfolio. I just want to hold them probably at market cap weight or something like that. I want them to be a small piece of it. And there’s like, it’s gold, but you can choose and you could stack the odds in your favor, how you want that to play out.
Pat Collins (29:54)
Earlier we were talking, I mentioned this, it made me think your discussion or your thought around owning the gold miners versus gold itself. It’s kind of the same thing as like, I would rather own a sports betting company than actually gamble and bet on a sports game. One is gambling, one is speculative investing, but it could turn into inside of an index, I think it turns into scientific investing. But again, look at the odds and the probabilities and whatnot.
Private Equity: Speculative or Scientific Investing? – access, costs, concentration, and dispersion make it tough to make it scientific investing
Next one up we have was private equity. This has kind of been in the news a little bit, if you’ve been following it all, if you’re in our industry, that private equity has been kind of been green lighted for 401k plans. I don’t know how many 401k plans are actually going to adopt this, but it could become more mainstream or people at least start to see and hear about it. So private equity is it’s like investing in stocks. just these are not publicly traded companies. These are private companies that people make investments in and they own some sliver of that company.
you know, oftentimes through kind of an aggregated firm, like the private equity firm that goes and makes these bets. But how do you think about private equity in the terms of gambling, speculative versus scientific investment?
Marcus Schafer (31:06)
Have you just like active stock picking, right? Or somebody out there and they’re going and they’re purchasing a company. I think the difference for private equity is they tend to be purchasing control. Like they actually influence company behaviors much more than a traditional active manager can do for a public company or an individual investor could do. So they might have some say. The challenge is when I…
look at the odds of success and I look at the data and can you actually capture the average? That’s where it turns really speculative. And if not diversified enough, think gambling as well, but I specifically have an issue with one, idea active investing doesn’t pan out in public markets. So what’s really different? Why would we expect it to happen in private markets?
And I just have a significant question about the costs in order to do so. And finding these companies, installing good management, staying in the game is not a cheap proposition. So I’m not saying it’s, there might not be worthwhile. I just question as an investor, what am I getting after it? Especially if I’m not getting enough diversification where if you look at the dispersion of returns,
between private equity managers, they’re way more dispersed than public equity managers. it’s kind of the odds seem to me to be more speculative investing, but again, positive expected returns. So, we’re kind of splitting hairs from here probably.
Pat Collins (32:48)
your point. I think the data kind of suggests that there is a positive expected return with private equity. It’s done very well over time. agree, there’s a wide range of outcomes by managers and whatnot, much more compared to the public markets. But they’re all positive. I haven’t seen too many where it’s like this whole group of managers have crushed and lost money across the board. So, yeah, I agree with you.
The ⁓ concentrated nature of private equity tends to make it more of a speculative investment in my mind. I think there are ways that investors, if you’re large enough, that you can kind of diversify some of that and probably make it a little bit more closer to scientific investing. But yeah, I agree with your premise. The next one we had on here was real estate. And this is probably, there’s a lot of different categories here, but maybe just traditional real estate. Let’s start with this.
Real Estate: Is Land A Speculative Investment? (11, 12) – depends on if you have a use for it
Maybe just land. You’re buying, you know, I’m going to buy this piece of property over here. Is that speculative? Is that gambling? Is that, you know, just a really good investment?
Marcus Schafer (33:53)
The odds are that’s gambling in the sense that when you look at the rate of return on land in the US, we kind of did some episodes on this, it’s barely beating inflation. that, I just think that’s extremely speculative, especially if it’s done without a purpose. If you’re buying land because you want to build a house on it, that definitely has positive expect return for you.
because you have a use case for it. But I would say gambling.
Pat Collins (34:27)
Yeah, I might disagree a little bit. think there’s a, an element of speculative that I would put in this, which is I think if you have, we talked about luck and skill. think if you have skill in the sense that you have information, you’re a developer, you know, kind of, ⁓ certain types of projects that are going to be coming along over, over the years, you know, things that have been green lighted and you say, I know that five years from now, there’s going to be this big.
community that’s being built over here. Nobody else really knows much about it. I’m going to buy this property half a mile away because I think it’s going to go up in value. It’s definitely speculative. don’t know if it’s, I would put it in the pure gambling. Gambling I look at is you have a loss, expected loss out of it. think with land, in general, I would say, I would totally agree with you. Land should earn about the rate of inflation.
You’re getting something, but it’s not, it’s certainly not optimal compared to what you could be getting somewhere else. So, but last one we had in here, this is kind of a new one. haven’t, I haven’t had a whole lot of experience with this other than watching it on the news and whatnot is prediction markets. So you can actually bet on things like the outcome of an election. So, kind of like sports betting a little bit, but just kind of, you know, predicting other things. So thoughts on that.
Prediction Markets: The Purest Form of Gambling?
Marcus Schafer (35:46)
⁓ wow. Gambling, just because it’s you and a counterparty. And I think that markets are going to be pretty efficient, Crowd source ideas. Useful for journalists to quote expectations about things that you expect to happen. But I can imagine a lot of favorite long shot buys happening within those markets where there’s some real weird.
that’s that’s a are just expensive to
Pat Collins (36:19)
take.
This to me seems like one of the purest forms of gambling. I’m just going to bet on something that’s like kind of random. But yeah, I would put this heavily in the gambling category because my sense is, is that the actual companies that are offering these prediction markets, I don’t know how they work, but I’m assuming they make a good amount of money. There’s quite probably quite a bit of vigor that spread in there as well.
Moving on, we’ve been talking a lot of kind of hinting at probabilities and understanding kind of the statistics behind the bets that you’re taking, either investing or or gambling. And I think we have some really good data here to share. This is from 2018. There was a kind of a study that was done on the S &P and it was about the probability of basically earning a
4 Strategies to Become the House in Investing (13) – investing increases odds of success overtime whereas gambling decreases odds of success over time
positive return. So what’s the chance you’re going to make money versus what’s chance you’re going to lose money? And they looked at different time periods. And, you know, the S &P goes back to 1926. So we have a lot of data. It’s, in this case, it was over 90 years of data here. And what we found was really interesting. Fifty three percent of every daily period. So if I invest in at the market open and then I sell at the market close.
53 % of the time I’m going to make money, 47 % of the time I’m going to lose money. So again, I talked about this early in the podcast, that feels like gambling to a lot of people. because it’s very hard to distinguish between that and what the probability is that you’re going to win in roulette by putting your money on black. And the probability there is 47%. So that’s very hard to distinguish them by making one or two bets. You really can’t tell.
So ⁓ it does feel like gambling with the stock market. I think that’s something to just recognize. But as you start to go out longer, this kind of law of large numbers, exponential things are happening. So once you get to a month, you have a 63 % chance of making money. Once you get to a year, it’s a 74 % chance of making money. Five years, 88%. 10 years, 94%.
So when you think about that as an investor, it’s again what we talked about earlier. It is tilting things in your favor. You look much more like the house in gambling than you do like the actual gambler. And it should give you a lot of peace of mind that I have a 94, at least from history’s standpoint, I have a 94 % chance of earning a positive return if I stay invested for 10 years.
Starting there, that’s certainly kind of the stock market side of things. The other side of it is looking at it from the gambling perspective. I mentioned roulette. You invest in black. It’s kind of one of the purest things to do with gambling is invest in red or black. So I invest on black. I have a 47 % chance of winning because I can, you know, obviously it could be red, which I, you know, it feels like it should be 50-50, but there’s kind of the double zero where I could lose money on.
that can potentially, everybody loses on that. I did some statistics and kind of did some numbers here. And what I found was if you bet 10 times in a row on black, probably they’re going to is 36 % other side of it. I’m going to 64 % of the time I will lose. If I go out to a hundred times and I bet on black a hundred times in a row, there is a 67 % chance that I will lose money. So as you keep gambling, the probability keeps going up that you’re going to lose.
If you’re investing, it’s the exact opposite. The longer that you wait, the longer, the higher the probability that you’re going to win. And that is just kind of the key things here, I think, to understand when you’re investing is the longer that you have, the higher the odds are that you’re going to There’s no guarantees you’re going to win. There’s no guarantees you’re going to lose when you gamble. But the odds change over time and you should know the odds.
Marcus Schafer (40:30)
Yeah, it’s great. know, there’s always like, why do casinos feel the way they do? Cause they want you to stay there. Well, that tells you something about the likelihood of you losing money the longer you stay there. And it’s just the opposite for stock markets. And I think, you know, going back to how we open like, yeah, the stocks have a positive expected return. That’s very different from gambling. So I think those two are distinguishing and
It’s really important to break down some of these checklists to think about, what’s a gamble versus not? I think one of the most important things is simply, is this pure zero sum or is the pie going to grow on top of that? Because if the pie is going to grow, that’s going to lend towards investing. If the pie is going to stay the same and you’re just competing against somebody else, that’s just a pure gamble. So the question you should be asking is like, hey, is this a fixed bet or are
Am I betting on something that we expect the pie to grow? I think that’s another good checklist item to have.
Pat Collins (41:36)
Absolutely. think if we’ve if we’ve convinced you obviously that there’s kind of these three ways to think about placing a bet, it’s gambling, speculative and scientific. I think I would like to maybe leave the audience with the idea of how do you move from speculative? You know, let’s say we’ve already convinced you that gambling, you know, is entertaining and it’s not going to doesn’t have a bunch of a positive return. But how do I move from speculative? What are the things I can do to tilt the odds in my favor to become more like the house, to have a higher probability of winning?
And basically I had four areas for investors to think about, kind of take away from this podcast. So first is, and we’ve talked about this in hint and add through the whole podcast, it’s diverse fire assets. 57 % of all stocks that we found have a return lower than T-bills or cash. So that means that if just on average, if I was just going to pick a stock on average, I should pick a stock that underperforms cash. If I was just kind of randomly selecting any stock.
4 % of stocks in a, basically, if you kind of looked at the market, 4 % of stocks account for all of the gains of the market. The other 96 % have basically kind of matched basically T-bills essentially. So I think it’s really, really important that you diversify that tilts the odds in your favor, that you are going to have a higher probability of winning. We talked about this, the stats, if you wait, you know, one day, one month, one year, all the way up to 10 years, that’s all market-based. That is not individually stock-based. So
invest in the market, diversify your assets. The second one is to understand your time horizons. So if I have a time horizon of one month, the stat that I mentioned was I have a 63 % chance of making money in the stock market over one month. That’s not great. It’s better than 50-50, but it’s still not great odds in my mind. So if I need my money a month from now, I’m not going to invest in the stock market. I want to really increase the probability of my outcome.
And that’s going to mean that I’m going to invest in something safer, that I have some certainty that it’s going to be worth more a month from now than what it is today. If I have 10 years, I have a lot more probably. I feel like the probability is much higher than I’m to make money over a 10 year stretch. Third is to think about the things that could really, you know, just erode your returns over time. And it kind of, again, kind of tilts me in the other way, which is underperforming or maybe looking a little bit worse.
So the big ones there are fees and taxes. How do I select funds that have the lowest fees possible? How do I make sure I’m as tax efficient as possible? That all tilts the odds in your favor. And then the final thing is your biases. These are the things that I never like to tell a client or a prospective client, well, you
you have to, we’re going to save you from yourself. That’s usually not something I would say to somebody, but we all should recognize our brains. And if you want to learn about this, getting back to the last podcast, our brains are not wired to be great investors. And this is the thing where a lot of times people will say, that’s not me. This is the one thing that can totally wreck returns. Buying a fund that charges an extra 0.25%. Yeah, over time it does erode returns, but
you’re still going to have a positive expected return. I’ve seen people do things where the market drops 50 % and they get out and they don’t get back in. And that is basically just life-changing from a return standpoint. So these are the things, just the big decisions that your brain can kind of force you into. Check those, make sure that you have a process to kind of think through decisions so your biases don’t kind of get in the way essentially. But those are the four things that I think you can take away is how do we become more like the house and less like a gambler?
Marcus Schafer (45:20)
And in that bias, invest, right? Because think about the opportunity costs if you never invested like you were mentioning. I think it was your uncle who was just in super safe government bonds for a really long time. So I will maybe make some updates about next episode because we kind of have gone a little investment geeky here. ⁓ next episode, we’re going to have super, super awesome guests.
Board of Director Episode Coming Next
who are going to talk about boards of directors. I think that’s going to be really interesting for our audience. How can companies establish boards of directors to better protect shareholders and encourage growth and do all these amazing things? But also, how can you as an individual think about joining a board of directors? So that one is going to be absolutely awesome. And I hope people appreciate the pivot away from us talking about probabilities.
Pat Collins (46:16)
Yeah, I’m looking forward to it. Thanks.
Sources:
1 Thaler, Richard H., and William T. Ziemba. 1988. “Anomalies: Parimutuel Betting Markets: Racetracks and Lotteries.” Journal of Economic Perspectives: https://www.aeaweb.org/articles?id=10.1257/jep.2.2.161
2Sauer, Raymond. (1998). The Economics of Wagering Markets. Journal of Economic Literature. 36. 2021-2064. https://www.researchgate.net/publication/4732178_The_Economics_of_Wagering_Markets
3 Baraniuk, Chris. “Why Gamblers Get High Even When They Lose.” BBC Future, (July 21 2016) https://www.bbc.com/future/article/20160721-the-buzz-that-keeps-people-gambling
4 “The Science behind Gambling.” Responsiblegambling.org, (2025) https://responsiblegambling.org/for-the-public/about-gambling/the-science-behind-gambling/
5Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN:https://ssrn.com/abstract=3423101
66 Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance, The Cross-Section of Speculator Skill: Evidence from Day Trading (December 31, 2012). Available at SSRN:https://ssrn.com/abstract=529063
7 Ritter, Jay R., The Long-Run Performance of Initial Public Offerings (1991). University of Illinois at Urbana-Champaign’s Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1505889
8 Ritter, Jay. “IPO Data.” Jay R. Ritter https://site.warrington.ufl.edu/ritter/ipo-data/
9 Asness, Cliff S. and Frazzini, Andrea and Israel, Ronen and Moskowitz, Tobias J. and Moskowitz, Tobias J. and Pedersen, Lasse Heje, Size Matters, If You Control Your Junk (January 22, 2015). Fama-Miller Working Paper:https://ssrn.com/abstract=2553889
10 Rizova, Savina and Saito, Namiko, Investment and Expected Stock Returns (July 8, 2020). Available at SSRN: https://ssrn.com/abstract=3646575
11 American Dream: Is Your House Your Greatest Investment? | Greenstream #8 https://www.youtube.com/watch?v=z-_Eg-hHaPA&t=2s
12Real Estate: Expected Returns and Expected Headaches | Greenstream #9https://youtu.be/Hhscc3TLEEY?si=VrRQwYSzFTAGMVTa
13 Bessembinder, Hendrik (Hank), Do Stocks Outperform Treasury Bills? (May 28, 2018). https://ssrn.com/abstract=2900447
Greenspring Advisors is a registered investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. The social media platforms associated with this name are solely for informational purposes and do not offer advisory services or sales of securities. Investing involves risk and possible loss of principal capital. Comments by viewers and/or recognitions are no guarantee of future investment outcomes and do not ensure that a viewer will experience a higher level of performance or results. Public comments posted on this site are not selected, amended, deleted, or sorted in any way. If applicable, certain editing of personal identifiable information and misinformation may be deleted. Content may be dated. Links to third-party sites, or information is from a reasonably reliable source. Information presented on this program is believed to be factual and up-to-date, but we do not guarantee its accuracy, and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the options presented.