Gambling will always result in a loss over the long run although the gambler may not know it.
Why do we say that gambling will always result in a loss? For a gambler to come out ahead in the long run, the ratio of his winning the bet must be larger than the odds against him. If there is a l to 10 probability that he can win, the winning must be at least 10 times larger than the bet placed for him to come out ahead over the long term. An example using 4 digits forecast will make this principle clear.
The principle is just as applicable to other forms of gambling. in four digit forecast, there are 10,000 numbers which are available for selection and only three numbers have a chance of being selected for the first, second and third prizes. Imagine a gambling syndicate made up of 10,000 people formed solely to bet against the four digit company, For each draw, each member of the syndicate places $1 on one number and they rotate the numbers among themselves and share out all winnings. The 4digit company therefore collects $10,000 from the syndicate at each draw. Since all 10,000 numbers are taken up, three members of the syndicate are bound to win. But what is the total size of their winnings? It is only in the order of $6,000 and each member of the syndicate collects 60 cents for the $1 he places for each draw. There are few people daft enough to wish to join such a gambling syndicate but to bet on the four digit forecast continuously over a long period of time is like joining such a syndicate. Over the long run, the laws of statistics will prevail (remember the Law of the Large Number). Gamblers will always lose. Anyone who does not believe this has only to look up the profits made by Casino and lottery company, year after year.
There are certain situations in the world of investment which resemble gambling and investors are well advised to keep clear of them. To buy shares when the market is at its ‘hottest’ is definitely gambling because like all bull markets, once everyone interested has been sucked in, there are no more lambs left and the market can only go down. To sell shares which have been held through a long period of decline is also a gamble because the market is cyclical; it will recover after a long period of decline. There are many other examples of the ‘sure lose,situation in investment and you will learn of them as we progress through this article.
In summary, we can say that this much is clear. The difference between what is investment, speculation and gambling is not much and it is all a question of the probability that the market will move in our favour over the long run. To be a wise investor, each of us must know what we are buying and what is the probability that the share we are buying will go up in the future. There will be several chapters later on in this book which will help you to make this forecast.