Written by Kyle J Christensen, CFP, April 12, 2021

I’ve had a lot of conversations lately with clients about the difference between gambling and investing. Many of my clients have seen others (even some of my clients) make a lot of money “investing” in Bitcoin and other cryptocurrencies. The ones who haven’t “invested” in Bitcoin are feeling left out and left behind. They wonder if what they have been doing, working hard, saving some of what they earn, building up their businesses and real assets, that provide a service or benefit to society, is truly the right way to go. They see others making a lot of money, without actually having to work or learn anything, and without investing time. They see that they can take a hot tip from an investment research company or a friend and make hundreds of thousands or even millions of dollars. It seems to be much easier than the path that I have taught them, and it certainly is.

One thing I want to be clear about from the beginning is that gambling does pay off sometimes. Sometimes, people get the right cards. Sometimes, when people pull the handle of the slot machine, it works out. The word gamble, according to Websters Dictionary, means “to play a game for money or property”, “to bet on an uncertain outcome”. Another great word to look up is speculate. To speculate means “to review something idly or casually”, “to assume a business risk in hope of gain especially: to make a relatively risky investment in something in the hope of making a large short-term profit from market fluctuations”. The word invest means “to commit money in order to earn a financial return”. It means “to endow with quality”, “to furnish with power or authority”, “to grant someone control, “to cover completely”. I’m not writing this article to place any sort of moral judgement on gambling or speculating. My objective is only to differentiate gambling from true investing. If someone makes a bunch of money gambling or speculating, good for them. If a person gambles and makes a lot of money doing it, just admit that’s what it was. Don’t call it investing. Words matter. The meaning of words matters.

I get that Wall Street has effectively, over the years, confused many words. For instance, they have done an amazing job of calling speculating “saving”. For example, they don’t call retirement accounts “retirement investment accounts” or “retirement speculation accounts”, even though that’s what they are. They call them “retirement savings accounts”. The money that goes into these accounts is not savings. It goes into investments, mutual funds, stocks, bonds, etc. What’s the problem with confusing the words? Who does it hurt? Why does it matter? It matters because it causes people to gamble that otherwise would never gamble with their money. It causes people to speculate with their money. Oftentimes people who can’t afford to speculate. It causes a herd mentality, and it’s completely on purpose. It’s on purpose because Wall Street has every intent of having everyone give them some of their money, every time they get paid. They know they can’t get everyone to put money in the stock market unless they cloak it with the appearance of being a “savings”. Save means safe. Everyone should save. They know that. That’s why they use that word instead of what it really is.

In this confusion of words and their meanings, how can a person know whether they are investing or gambling, and why does it matter to know the difference? It matters because one you have a much higher level of control and influence over the outcome. The other you don’t. One you can repeat over and over again with a predictable outcome. The other cannot be predictably repeated. For one, the success relies on following enduring principles. The other, “what’s a principle?” One can be taught to anyone and anyone can succeed with it. The other, it’s complete luck on the timing. It’s a roll of the dice. One, you provide a service or benefit to society. The other, you simply trade money for more money, without providing anything of value. One, requires time and effort. The other, doesn’t. One requires some level of expertise. The other requires no expertise other than a “hot tip” or the reliance on someone’s gut feeling.

Here’s a list of questions you can ask yourself to know whether or not you are actually investing, or if you are gambling. Again, I’m not saying not to gamble or speculate. I’m simply suggesting that they are not the same thing. Here’s the list of questions:

• What did I study prior to investing money in order to become more of an expert in the area of interest?
• If I were to rate myself on a scale of 1 to 10, 10 being an Expert and 1 being “I don’t know what I’m doing”, where would you rate yourself?
• What principles did I use to help me identify whether this was a good investment opportunity or not?
• How much work or effort is involved in order for me to invest and succeed with this investment?
• How much time is required in order for me to succeed with this opportunity?
• What value or benefit does my investment provide to others in society?
• Am I doing this mainly because I feel (or am being told) I could get a high rate of return? Is there any other reason?
• How much control or influence do I have on the outcome of the investment?
• Is the result or outcome of the investment something that I know how to repeat?
• Is this something I could teach someone else to do for a similar predictable outcome?
• How much of the result is simply stems from incredible timing (being in the right place at the right time), and not knowledge or control?
• How will I know when to sell the investment? By the same token, how will I know when it’s a good time to buy or invest?
• Am I doing it mainly because it appears to be an easy way to make money?

I could go on, but I believe these questions will suffice. I’m not going to give a complete list of possible responses to these questions and arguments for or against. I believe if people are honest with themselves, they’ll find in many cases that they really aren’t investing. They are gambling. That they really don’t know what they are doing. That they really don’t have control. And ultimately, they got lucky. It happened to be perfect timing, but isn’t something that they can controllably repeat.

I love George Gilder’s book, The Scandal of Money. I love how Mr. Gilder ties learning with investing. That those two things are actually synonymous. That true investing requires true learning and that investing without learning isn’t actually investing at all. One of the things that I always teach my clients is that investing is about becoming. Your greatest investment is you. It’s what’s between your ears.

I’ll end with this great quote from The Scandal of Money: “…changing money from the medium of economic activity to the message itself, has thwarted economic growth, punished savers, and rewarded prestidigitory finance over innovation. Casting a shroud of uncertainty over all valuations, monetary manipulations shorten the time horizons of the economy.” In other words, changing investing from creating something of true value for society for a return to pure speculation on money itself for a return of more money, is manipulation and is ruining money and the purpose that it fulfills.

Some will say that that’s why cryptocurrency exists, to stop the manipulation of money. It’s very clear to me that massive manipulation is occurring within the cryptocurrency world, it’s just not being done by governments. It is now a world of mass speculation and manipulation. It’s a bubble if I’ve ever seen one (52 week range from 6,555.50 to 61,683.25 as of today – nearly 1000% increase) . Probably the fastest growing bubble of my lifetime. It’s hyped as much as any other investment I’ve seen in the past. What’s the value it provides? What’s the service? There is none. For those who consider it a currency, you need to study up on what a currency actually is and actually does (read The Basics of Bitcoins and Blockchains by Antony Lewis). I’m not saying cryptocurrency isn’t a type of asset. I believe it is. I’m not too sure what benefit it provides to society though. I understand what it’s original intended purpose was, which was to have an unregulated and decentralized form of money, but by the nature of its own volatility, it cannot become or replace money. And if anyone thinks the Federal Reserve is going to give up the power they derive from controlling money, you’re in for a big surprise.

Finally, gambling and investing are not the same thing. You’ll be better off not confusing the two. You can achieve financial freedom by following the principles of wealth creation. You don’t have to gamble to get there.