The Gambler And The Investor

On today’s show we’re taking a step back and taking a fresh look at what it means to be an investor.

But before we do, we need to clarify what we mean by investor. The English language fortunately has a rich vocabulary which makes it easier to make distinctions. These different words have different meanings. But sometimes in casual conversation it has become increasingly common to stretch the meaning of these words and use them inappropriately.

I think we would agree that a gambler and an investor are not the same thing. A gambler is engaged in a game of chance, knowing that the odds could result in a win or a loss. When you roll a pair of dice you have a 1/36 chance of rolling double sixes. That’s a 2.77% chance. Depending on the construct of the game, you could win, or you could lose.

When you go to the roulette table at the casino, you have a 1 in 37 chance of choosing the winning number. The casino will payout 35 times the bet, so on average, the casino will win all your money if you play long enough. But if you stop after a winning round, you could come away with some pocket money at the end of the evening. Nobody would ever confuse a gambler with an investor.

Gambling might be a way to raise money, but it’s not something you would ever do to raise money. You would never say, I’m going to the casino to raise an A round of financing for my startup company. There is a very clear distinction.

Investing first and foremost is about value creation and riding the coat-tails of value creation. When you sit back and ask a simple question like, “Why is that single family home worth $400,000?” The answer might be elusive to some. Some might say, well it’s because comparable properties in the area have sold close to that price.

If you ask the same question about a crypto-currency. Why is Bitcoin worth $40,000 or $60,000, or $2,000? The best you can come up with is “just because”. Well Just because doesn’t cut it. We get more sophisticated versions of just because. Some will say that there are a finite number of bitcoin in existence. It’s the artificial scarcity of a maximum 21 million that makes bitcoin valuable.

At last count, there were close to 10,000 other crypto-currencies in existence that are all variants of the theme on crypto. When you add the potential for those other currencies to provide substitution, the supposed scarcity of bitcoin is questionable. We have seen crypto enthusiasts talk about Etherium, RIPL, Doge, and numerous others.

But the notion that its value can fluctuate by 40% in a single month as we have witnessed in the past 30 days, means that crypto is not a useful store of value.

When you exchange dollars or Euros or Pesos for a crypto currency, you’re not investing. You’re not investing because there is no intrinsic creation of value. Which brings me to a new word we have not discussed yet today. That’s the word speculation. The word speculation is not that different from the word gambling when you closely examine the underlying meaning.

In the world of investing, I can buy shares in a project or a property or a company that is creating value in the marketplace. The residual cash created by that venture creates additional value that can be distributed to the investors as a return on their investment.

There is almost nothing in common between the world of gambling and the world of investing, even though there are those who seek to oversimplify the two and consider them equivalent. In the world of investing, you are taking calculated risks on the future performance of a venture. There is agency between the risk and the outcome which ultimately affects the outcome. In the world of gambling throwing the dice harder or with greater wrist action or a larger swing doesn’t affect the outcome. There is no agency.