October's "Rule Breakers" Mailbag: Is Investing Gambling?

On this week's Rule Breakers podcast, Motley Fool co-founder David Gardner starts his monthly dip into the mailbag by helping out a listener who doesn't quite know how to respond to a friend's statement that stock investing is gambling. "In one sense, your friend is right," says David. But then he explains what the key difference between Vegas and Wall Street really is.

A full transcript follows the video.

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This video was recorded on Oct. 25, 2017.

David Gardner: Mailbag Item No. 1: This one comes from Zach Miller, @zmills12 on Twitter. Zach simply said, "Hey @RBIPodcast. Had a friend tell me my stock portfolio was gambling. Building a stock portfolio was gambling. Help me here. I know it's not, but what would DavidGFool say?"

Well, thanks for asking, Zach, and you know I've always got an answer for almost anything, even when I don't know the answer, and so the first thing I'd say to your friend, because you definitely want to build a bridge to this, let's face it, critic. I think it's very helpful to build a bridge.

So right away you say, "Yes." We'll just say his name is Bob. "Yes, Bob. It is kind of. You're right. Because it is gambling in this way. You are risking money when you invest, and you have little control over the outcome. So yeah, it is kind of like gambling."

But -- and here comes point No. 2 -- it's not really like gambling for these couple of reasons, Bob. First of all, when you gamble you go into a Las Vegas casino. Generally the house is making somewhere between 2-10% profit off of every single transaction. So some of the best odds you can get are just the slot machines. Some worse odds, some of the other games. And so the bad news, there, for anybody who's gambling is you're probably going to lose money, whether you're going to admit it or not, and that's because the games are naturally, statistically going to do that night in and night out.

And it gets even worse if we start looking at state lotteries. I'm not sure if everybody knows this, but half of the money from every dollar ticket that anybody buys on a state lottery -- half of that [fifty cents] goes right away as a tax. So that's really a bear market every day. You're down 50% every day you buy a lottery ticket.

So gambling -- minus returns. Statistical. Fact. Repeatable. Not a great idea.

But Bob, here's the thing about building a stock market portfolio. The stock market goes up about 10% a year. Yes, some years it goes down far worse than what you would have gotten at Las Vegas. But taken all in all, and two years out of every three, it goes up and just by building a portfolio you're participating in that positive money making dynamic that is antithetical to gambling and what these so-called gaming industry and sometimes your state lottery sells every single day.

So Bob, you're right, but you're not totally right. Thanks, Zach.

David Gardner has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.