Some of you know I am a devout sports fan. I especially love basketball, football and soccer and almost every time I turn on the tv, it is to watch some sort of a sporting event. And I love the Phoenix Suns. We are Sixth Man Members, which means season ticket holders.
At the end of this season, the Suns organization emailed a long survey and it made something crystal clear to me. I am not a fan of online betting. The survey asked a ton of questions about sponsors both on Suns broadcasts and in-arena. Could I remember their names? What business were they in? Who were their competitors? What was my impression of them?
And most of these advertisers were in industries like financial or legal services, consumer products, retailers, etc. But one category was sports books. And as I went through the survey, I discovered I could remember the names of these particular advertisers, which I couldn’t really do with most of the others, AND I ranked them as low as you could go on the scale of favorability and overall impression.
Why?
It’s not like I am against gambling in any principled way. I have been known to go to Vegas on occasion and lose a few bucks at the craps table. I also have played some informal poker with friends and certainly enjoy the excitement of a final-four bracket, even if it costs me $30 each (and every) year.
But the overwhelming promotion and availability of the online sports books, and their apparent ease of use, is a different story. And I really want to direct this message at our young people. There is a huge difference between gambling and investing, and it seems to me these two new services, online sports books and prediction markets, are doing their best to blur the line between investing and gambling. There are even some online investing apps today that seem to have gamified the investing process.
What is the essence of investing?
In a word, it is ownership. Ownership here means a claim on the cash flows and/or future growth of your investment.
What is the essence of a bet?
The answer is hope. You have the hope your bet will provide a payout.
These two things may sound similar. Certainly, there are investors who hope their investment will work out favorably and there are gamblers who claim ownership of a particular payout. But the process and the mentality in these two activities are very different.
The process of investing requires discipline, planning and patience. It also takes a lot of research and strategy. Placing a bet may also involve a lot of research and strategy, but discipline, planning and patience are not typically part of the app betting process. And that would seem to be even more true in prediction markets. These markets are seeing tremendous growth. According to Charles Schwab and Dune, the monthly dollar volume of transactions has gone up more than five times just since November of 2024.
There is a saying all gamblers know; the house always wins. Prediction markets have made an effort to distinguish themselves from gambling by arguing that their bets are zero sum and there is no “house” money. A dollar lost by a “player” is a dollar won by another, less the transaction fees. Yet, the outcomes participants are wagering on are called bets.
In either case, gambling differs from investing most profoundly in the concept of compounding. A bet on a sports team, a card or dice game, or on a future event, is theoretically unpredictable. The process of investing in a company, collecting cash flows and benefiting from business activity growth follows predictable cycles. And as the cash flows and enterprise values grow, they compound. That is to say, they provide returns on top of returns. This is something no parlay will ever do, despite astronomic odds.
It is true that both investing and gambling can lead to losses. This is where the two activities are most similar, and both require a certain level of risk tolerance. Whenever a client has compared investing to gambling, or asked about a short-term expectation, I always say the same thing. I can’t tell you exactly what this investment strategy will do tomorrow or next month, or maybe even next year. But I can be reasonably sure where it will be in 10 or 15 years. And one of the keys to that expectation is compounding.
The worst outcome from gambling is not just the loss of a dollar. According to a research paper by economists Scott R. Baker, Justin Balthrop, Mark J. Johnson, Jason D. Kotter, and Kevin Pisciotta—"Gambling Away Stability: Sports Betting's Impact on Vulnerable Households"— a dollar directed to gambling equates to a net negative two dollars in investment in equities and other financial instruments. That’s because most often that dollar doesn’t come out of leisure and entertainment budgets.
If you’re wondering about your compounding and wealth strategy, please reach out to us at EverVest.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.