I don’t consider myself a gambler. I take calculated risks – there’s a difference.
I’ve been playing with the idea of this post in my mind for a while, and decided it was time to get it out there.
It’s likely that I’m going to regret it somewhere down the line, as someone is most likely going to throw it in my face eventually (My money is on the wife. – OH SHIT, did I just gamble?) 😛
Anyway, this post is (primarily) intended as a historic reminder to myself. I once proclaimed that I was not a gambler. Living up to that statement is not going to be easy – because let’s face it: We’re all gamblers in some way.
So what is the difference between gambling and calculated risk, Nick?
Follow me into the dark (and cobweb-filled) corners of my mind, and let’s explore this topic together!
Gambling refers to wagering money in an event that has an uncertain outcome in hopes of winning more money, whereas speculation involves taking a calculated risk in an uncertain outcome – Investopedia.com
Well that was easy. Now that we’ve got that established, there’s really not a whole lot more to say about that. But you know me! – I don’t stop until I’ve reached at least 1000 words 😛
In 2014 a successful danish company named OW Bunker went bankrupt, only 8 months after a very successful IPO (shares up 20%). I remember it vividly, because I was working in an investment bank at the time. It was big news in little Denmark, and OW Bunker was on everybody’s lips after their successful IPO. People invested their savings, their pensions and whatever pocket money they could find in this company. It was going to be the next Maersk (the biggest company in Denmark – unless you count the government as a company… 😉 )!
I did not invest, because I’m not a gambler.
When you invest your money in a single stock, you believe that you are taking a calculated risk, but unless you’re a value investor (and a very good one at that), you are in fact gambling. The vast majority of the people investing in single stocks are in fact not value investors (it takes practice, tenacity and a lot of hard work to become like Warren Buffet). – They are gamblers.
Remember the definition of gambling from Investopedia: Gambling refers to wagering money in an event that has an uncertain outcome in hopes of winning more money.
Gamblers hope to WIN more money.
Lesson #1 of Gambling: If there is a winner, there also has to be a loser (typically, the house is the winner – but that’s another story 😛 ).
The people who gambled on OW Bunker becoming the next big thing, lost their wager. However unlikely and improbable the odds are of a publicly traded company going bankrupt – there is always the risk of such an event happening. Statistically though, the odds are slim, right?
So the fact is that when you buy stocks in a publicly traded company, unless you are serious about doing your homework (which very few of us are), you are in fact buying a lottery ticket. – And you hope to score that jackpot! While you believe that the odds are in your favor, you actually don’t know the odds of “winning the lottery”. Unlike the ACTUAL lottery; The odds of winning in the actual lottery is 1/8.000.000 (depending on the Lottery – some are even slimmer).
When you bet on the outcome of a soccer match, the odds of you winning are always 1/3 (because there is 3 possible outcomes of a soccer match, right?). By historical comparison, we can safely assume that the odds of winning the stock lottery, is a lot better than the odds of winning the actual lottery – and maybe the odds are even better than that of the soccer match? We can assume it, but there is no definite way of knowing the exact odds!
Lesson #2 of Gambling: Know your odds before you place your bet!
Enter: The Altman Z-Score. What’s this now?! Throwing around fancy value investor tools now, Nick!?
The Altman Z-score is a combination of five weighted business ratios that is used to estimate the likelihood of financial distress. For value investors, the score is a great time-saving tool to help calculate a company’s financial longevity and assess liquidity. However, the Z-score is all too often overlooked in favor of other simpler metrics such as basic gearing and debt ratios, although the score is relatively easy to calculate if you know how. – gurufocus.com
The Z-Score can be used as an indicator to (allegedly) predict bankruptcy of a company, 2 years prior to the event. Apparently it has proven to be an accurate indicator with upwards of 90% certainty! I wonder what the Z-Score of OW Bunker was?… (No, I’m not going to calculate it for you! Do your own homework dammit!).
Along with the Z-Score there are 5 other must have metrics for value investors. I’m not a value investor, so I’m not going to explain any of them here (Homework! Now!), because I am (admittedly) a lazy bastard. The odds of me being lazy is 100%!
Anyway, my point is:
The line between gambling and calculated risk is extremely thin. You can use whatever measures at your disposal to try and mitigate your risk exposure, but unless you know the exact odds of a given outcome (and still choose to enter the lottery), you are in fact a gambler…
But Nick, you invest in Crowdlending?…Surely you’re not going to argue that isn’t gambling?
Well, I actually was going to – but: 100% lazy, remember? 😛 I was hoping that by the time I had finished my ramblings, I would have come to some kind of clear conclusion that would clearly put my Crowdlending adventure in the “Calculated risk” category. But the truth is: I don’t know the odds of winning the Crowdlending lottery. I can assume the odds are in my favor, but remember: When you assume, you make an ass out of u and me 😉
I BET you didn’t see that one coming! (HA! Get it?!). What do you know, I am a gambler!
Note to future self: You are (not) a gambler, you’re not a value investor and the odds of you being lazy is 100%!