It gets me very upset when Someone wrongly draws an Analogy from Investments/Trading into the World of Gambling, saying "they are the same thing". They conclude this because both are events where money is wagered and money can be gained or lost. But that is where the similarities end.
I was recently making small talk with a fellow at the Airport when waiting to hop aboard a plane. He inquired about what I do for living. I told him I was an Options Trader. He scuffed at me, look at me as if I was lower than scum and proceeded to explain to me how "Trading was Gambling". I brought up numerous well known Investors and Traders such as: Warren Buffett, George Soros, Bill Gross, Eddie Lampert, John Paulson, Bill Ackman, ect. He replied those people were "Lucky".
In a vain attempt to explain to him Why and How the two were different (for my own amusement, to change his mind, and because I had an hour to kill) I proceeded to argue.
(1)Gambling creates a new financial risk, when no previous risk existed merely for the sake of that risk. If we decide to bet on a coin flip which has a 50% chance of coming up Heads or Tails we are creating a new risk.
(2)In Trading, one party assumes a financial risk that already exists for the purpose of a financial gain. If I buy a stock from you that you want to sell, I am taking on risk that was already in the market place. You may say its a new risk to me, which it is, however the risk would have been taken on by someone your broker matches up on the other end of the trade. The risk is constant in Trading and waiting to be assumed by someone.
(3)In Gambling the odds are fixed and calculated. That is why Casinos exist. They Systematically know the odds on every single game over a series of wagers. For Example: The house edge on a bet on a random number of an American Roulette Wheel (a game I would never play) is 5.3%. You will lose an average of 5.3 cents on every dollar bet. This is a non debatable fact.
(4)In Trading no precise odds of one event happening can be calculated. People may say they can use historical volatility models and other data sets to predict odds, perhaps they can come somewhat close. Long Term Capital Management tried to calculate such odds, and it did not work out too well for them. Trading odds are not exact. Trading odds are based on variety of factors and variables that occur outside of the game such as breaking news, government data, interest rate decisions, analyst reports, market sentiment, insider activity, natural disasters, order flow, ect. These variables cannot be accounted for, and therefore cannot be calculated.
(5)Gambling Events are one time occurrences, and are non-continuous. After the flip of the coin, roll or the dice or spin of the wheel, the game is over. The player must make a conscious decision to wager new money and begin playing a new game. He must become an active loser, and decide to play again, and again.
(6)Trading Events are continuous and Never ending. The Market is always in motion. Even when the Market is closed, news is happening and being priced into the market. When in a Trade, the market participant decides when to enter, how long to stay in, and when to exit. In gambling these rules are very clearly defined. The Trader does not have to choose to do anything. He can lose money for doing nothing. The market can take all of this money and more if he stays in a losing position for too long.
While this post may serve as a good argument as to Why Trading is NOT like Gambling and Why Gambling is NOT like Trading, many people just cannot understand it. The fellow in the airport surely could not. In fact, He did not offer any other counter arguments except using circular reasoning to restate his conclusion.
In the future I would advise just agreeing with the person and not wasting time debating them. Just tell them they are right, and you are wrong, and go back to doing something useful.
No comments:
Post a Comment