Ian Cowie: the differences between gambling and investing

Our columnist shares the growing unease about the way some digital businesses are deliberately blurring the line between gambling and investing.

What’s the difference between gambling and investing? Please don’t say ‘there isn’t one’ because cheap cynicism means many people will endure poverty instead of enjoying financial independence.

Even so, it is a topical question now the Financial Conduct Authority (FCA) has belatedly - and inadequately - recognised the risk that large numbers of vulnerable folk are being targeted with a variety of digital ‘get rich quick’ schemes. Talk about new technology, same old human nature!

The fundamental difference between the two forms of financial risk remains that most betting slips are worthless at the end of every race or game, but very few funds or shares ever go to zero. It’s as simple as that.

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Of course, share prices can fall without warning and we might get back less than we put into the stock market. That’s why pooled funds - such as funds, investment trust or exchange traded funds (ETFs) - diminish the danger by diversification.

Spreading our money over a wide range of underlying companies, countries and currencies enables individual investors to gain exposure to wealth creation around the world without taking too much risk.

By contrast, piling into a narrow range of direct investments might provide more excitement than most folk need or want.

For example, I know next to nothing about India’s individual enterprises but JPMorgan Indian (LSE:JII) investment trust is my longest-held share and first 10-bagger. I invested in what was then Fleming Indian at 63p per share in June 1996, and even after various stock market shocks they traded at 742p this week.

Similarly, many of the underlying businesses backed by Jupiter Emerging & Frontier Income (LSE:JEFI) remain unfamiliar to me. But buying shares in this somewhat esoteric trust at 82p in July last year has already paid off as they were priced at 102p this week, despite trading ex-dividend and yielding 4.3% income.

Closer to home, Worldwide Healthcare (LSE:WWH) trust gives me access to specialist sectors I scarcely understand. Shares were purchased at 1355p in March 2014, and traded at 3660p this week.

What about the big picture? Barclays’ analysis of investment returns stretching back to 1899 shows that if shares reflecting the changing composition of the London Stock Exchange were held for any period of five consecutive years, there was a three-in-four probability of beating cash deposits.

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Never mind the theory, I know the difference between gambling and investing from personal experience. Long ago, when I was still at school, I worked Saturdays as a board-marker for a local bookmaker.

Every week, I watched punters start the afternoon with a flourish by betting £20 to win but finish somewhat sadly with 50p each-way flutters. No wonder that the bookies’ shop had three counters marked ‘Bet Here’ but only one for payouts.

It put me off gambling for life. More than a decade later, I became a shareholder in the same national bookmaker; William Hill (LSE:WMH), since you ask. Then I discovered how much damage this addiction can cause and decided I did not need the money badly enough to be involved. So I sold up.

More recently, one of Britain’s biggest firms marketing Contracts For Difference (CFDs) and spread betting asked me to write some explanatory text for them. After I had done a bit of research into their business and the ruinous odds it offers to punters, I realised they were more of a spivvish bookie than a stockbroker. So I said ‘no’ and sacked the client.

That’s why I share growing unease about the way some digital businesses are deliberately blurring the line between gambling and investing. Or, as Richard Wilson, chief executive of interactive investor, explained: “In the digital world you can drag in 200,000 customers in a couple of months through clever user experience or UX on an app. And at the point of sale the customer sees ‘FCA Regulated’ and thinks it must be OK.

“But do they know if they are in a bank, with an investment platform, or effectively in a casino? The FCA needs to make it clear if people are walking into a casino or a pension company.”

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City cynics define a stockbroker as someone who invests your money until it is all gone. Hard facts show we have a much higher probability of getting wealthy slowly via investment trusts than gambling on CFDs or spread betting.

Although it is not the sort of thing they teach you at school, most of us spend much of our lives working for money, but investing in the stock market is a way to make money work for us. That beats giving it to the bookies.

Ian Cowie owns shares in Jupiter Emerging & Frontier Income (JEFI); JPMorgan Indian (JII) and Worldwide Healthcare Trust (WWH) as part of a global portfolio of investment trusts and other shares.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.