A few days back, I was at a carnival at Singapore Management University (SMU) whereby they have games and foods lined up. After I played the games, I was given lucky draw slips. The lucky draw’s prizes were quite attractive, there were three prizes– iPod Nano 16 GB, underwater camera and one other thing which I forgot. They announced the winner of the lucky draw only at the end of the carnival, therefore used the lucky draw prizes as a “bait” for us to stay until the end. It was effective, as I stayed back for quite long in the hope to get the prize.
In the end, I did not win any prize even though in my mind, I really thought I had a good chance of winning because I had 10 lucky draw slips!
Then I thought about what are the probability of me actually winning?
Conservatively speaking about 500 people played at the carnival and on average they too have about 10 slips, it would amount to 5,000 slips in total. The probability of me actually winning would be really low.
Because there are only 3 winning numbers out of 5000, the chances of anyone winning on the first draw is 3/5000*100%= 0.06%, on the second draw is 2/4999*100%= 0.04% and on the third draw is 1/4998*100%= 0.002%– this is considering that they only have one lucky draw ticket. Even though I had 10 tickets, the chances of me winning would still be about 0.6%, 0.4%, and 0.02% respectively!
With such an extremely low chance of winning, one would still hope (at least I do) and believe that we might still win. However when you look at the probability indicated above, is it realistic? the answer is no.
Moving on to the topic of investing, is it the same as gambling– what do you think?
A lot of people that I know thought that investing is the same as gambling, and I don’t blame them. There are indeed certain kinds of investing that is akin to gambling but the way I invest is not the same as gambling.
We should first start defining what is gambling. Gambling can be defined as “taking risky action in the hope of a desired result.” There are 3 parts to that definition:
- Taking risky action
- In the hope
- Of a desired result
1) Taking risky action. All of us know that in both investing and gambling, there are risks involved– that is the similarity. The key difference here is how the investor or the gambler is exposed to and manages the risk.
Generally speaking in the exposure of risks, in gambling, you will lose all of your waged money if you lose. In investing, you might not lose all of your waged money even if you are wrong because you can cut your loss, say at 15%– and you still have 85% of your capital left from that investment– to allocate to another.
When we touch upon the topic of managing of risks, the difference is that in investing, we are able to manage our risks better by reading up on easily available public information such as annual reports or quarterly earnings (considering if we want to invest in stocks) and make a judgement on whether to invest in the company or not. In comparison to gambling whereby information are not as easily accessible. Take for example if you are playing poker on the table, you cannot make a judgement on historical data or the probability of the opponent’s hand being weaker than yours as easily, a lot of it is based upon chance, judgment and “feel”. This brings us to the second point and the third point.
2) In the hope. “Hoping” to me has the connotation of the chance of winning being left to chance– something associated with gambling. While in investing as much as we do hope our investment results will turn out fine, that is not the main focus of why we invest. We invest only when we are convinced– backed up with logic and historical data– that our investment will work out. In my case, only buying when only based on my thesis, a particular stock is undervalued.
3) Of a desired result. The similarity in this is that both investing and gambling is a process for the common intention to get a result– which would, of course, be to earn money.
Disclaimer: The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.
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