Is investing in shares really gambling?

Nearly twenty years ago, 34-year-old Londoner Ashley Revell made a bet few of us would ever even consider.

He sold everything he owned – his house, his car, even his clothes – and took a flight to the United States where he checked into a Las Vegas casino.

The he headed for the Roulette wheel, where he gambled every cent he’d scraped together (a total of US$135,300 to be exact) on a single bet. Revell put his chips on red, his reasoning being he had a 50:50 chance of winning (in reality, his odds were less than 50%. More on that shortly).

He later said he was happy to either start again with nothing, or enjoy his life with twice as much money.

To some people, that sort of punt is no different to investing in shares. But as we’ll see, it’s a totally different scenario.

Wheel of misfortune

Roulette is a popular casino game, and possibly the easiest to understand. A ball is rolled onto a spinning wheel, and eventually falls into one of a number of numbered pockets.

18 pockets are red, and 18 pockets are green. In its simplest form, a punter can bet on either red or green. If the bet is successful, the house pays out 1:1, meaning for a $1 wager, the punter is paid $1, plus the return of their original stake. Or for the more adventurous, a wager on an individual number between 1 and 36 pays 35:1. Which means a winning $1 bet will be paid $35 in winnings, plus the original $1 stake. But there’s a catch. A standard Roulette wheel has 37 numbers, not 36. In addition to the 18 red and 18 green pockets, there’s number zero. Zero belongs to the house, and if the ball lands on zero, everybody loses (except the house).

Which makes the odds of winning on a single number not one in 36, but one in 37. In the case of our London friend earlier, his chances of winning weren’t 50:50. They were 50:51.39 which is less. Effectively, Roulette has an advantage to the house of 2.7 per cent that can’t be overcome.

According to mathematical probability, if you play Roulette for long enough, you will lose all your money.

What about roulette betting systems?

You don’t need to look far online to find all sorts of ‘systems’ promising to help you win money, and there are no shortage of ‘guaranteed’ ways to win playing Roulette.

One of the more popular strategies is the Martingale system. Every time you lose a bet, you double your bet for the next round. According to promoters, the system works because the more you lose, the more you stand to eventually win. When the odds finally turn in your favour, you’ll win a bundle.

Martingale, together with nearly all betting strategies, relies on the theory that eventually your losing streak will end, and you’ll win back all your losses.

It’s the same philosophy that argues if you toss a coin ten times, and every time it comes up heads, it’s more likely that next time, it will come up tails. Mathematical probably suggests otherwise. The odds of that eleventh coin toss coming up tails is exactly 50 per cent.

Betting systems, particularly with Roulette where the odds are fixed, don’t work.

Turning the tables

50 years ago, Australia’s first legal casino opened for business in Hobart.

It was a controversial event. Tasmanians even voted at a referendum before construction of the Wrest Point Casino could proceed (the ‘yes’ vote was a narrow winner, with 53 per cent support. Even today, some argue the referendum was rigged).

When Tasmanians voted on the proposal, it was on the basis that rather than locals, the casino would target mainland and international high rollers – people who would spend big, gamble big, and make a positive economic contribution to the state.

For a while, that’s how it played out.

But within a decade, management started taking notice of a group of young people who didn’t appear to be international high-rollers. University students mostly, they were spending hours – and days – crouched over the Blackjack tables, initially playing with small stakes. Worse still, they were winning, which wasn’t part of the casino’s business plan.

A short-term fix was cobbled together – the casino paid for them to head to Las Vegas over the University summer holidays. When the now cashed-up punters returned, they continued raiding Wrest Point’s reserves, making even bigger bets.

Banned from Blackjack

Unlike Roulette, the probability of winning (or losing) on the Blackjack table can vary. Rather than the house’s fixed 2.7 per cent advantage from the Roulette wheel, a skilled Blackjack player can reduce that margin to around 0.5 per cent, making it the least profitable table game for the casino.

Players will still lose money playing Blackjack, on average.

There is an exception, and that’s the people who can memorise every card dealt on the blackjack table, and instantly calculate how many cards remain in the deck, the number of aces and picture cards dealt and remaining, and the potential combinations of both.

By counting cards, that tiny margin to the house can be reversed – patient, cashed-up card counters may be able to make Blackjack profitable. But it can take many dollars, and many hours (and days) for those odds to work in your favour. By which time the casino management have worked out what you’ve been up to, and kicked you out.

Which is where David Walsh and a number of others come in. Mostly Hobart university students, they’d worked out that by calculating the odds of certain cards appearing as the deck was progressively drawn down, they could frame their bets accordingly, and turn the odds in their favour.

One of them, Zeljko Ranogajec, ditched his commerce studies to play Blackjack full time. Now, he’s often named the world’s biggest gambler, with an estimated worth of $600 million.

Eventually, Walsh and his cohorts were banned from playing Blackjack at West Point Casino, and that was just the beginning. Before long, the welcome mat disappeared in nearly every casino in the world.

But for David Walsh and his syndicate, they’d already made enough from Blackjack to start gambling with some serious money.

If you’re thinking about giving card-counting a go yourself, there’s some bad news. Many have tried, and nearly all fail.

Banned from Blackjack

After being shown the door at the casino, David Walsh and his syndicate started using mathematical analysis, serious computer processing power, and large amounts of money to get an edge.

Not content with winning $1.2 million in Keno jackpots within two years, they made the move into horse racing. Helped by a volume rebate agreement with the government-run betting agency, the syndicate made massive profits from racing. Thanks largely to the success of Walsh and his friends, in 2011, Tote Tasmania went bust, and after a government bailout, was sold to Tabcorp.

Today, David Walsh’s fortune (and then some) has been poured into his Museum of Old and New Art (MONA) north of Hobart.

Zeljko Ranogajec lives overseas. There’s talk of his group employing 300 people and gambling $2 billion each year, and a disputed ATO debt of around $900 million.

Can your everyday punter replicate that kind of success? It’s unlikely. Ranogajec’s strategy reportedly involves betting huge amounts on most of the major horse races in the world. It’s a high-volume, low-margin approach. It’s worked, but nobody else has been able to achieve similar results.

Gambling vs the share market

It’s a common argument – investing in shares is just gambling. That belief is reinforced by people with little knowledge of financial markets who buy shares based on a ‘hot tip’, expecting to make millions. Usually, they lose money. And that approach is closer to gambling than investing.

But pure speculation aside, the two are very different.

The obvious contrast is that nearly all long-term gamblers lose money, whereas people who buy good quality shares tend to become wealthier over time.

Mathematical probability determines the outcomes for most gamblers. In any game of chance where the odds favour the house, the outcomes for punters are poor.

But investors who shun stock-picking risk by investing in an index fund have a better chance of making money. In fact, most of the world’s major share market indices not only have a history of rising in value, after a slump, they’ve never failed to regain previous highs.

But there’s another key difference. Investment returns are influenced by a huge number of variables – company performance, economic conditions, interest rates, investor sentiment and even the weather. By investing in shares, you’re hoping that a company will prosper despite those variables. It usually pays off.

Gambling, particularly of the casino variety, has few if any variables. The odds are fixed and unchanging. The numbers on a roulette wheel are always the same. The odds of winning a hand of blackjack are determined by mathematical probability, not a fickle investment market. And those odds favour the bank.

A final tip

Each year, millions of Australians spend billions of dollars buying lotto tickets, despite the infinitesimal chance of winning a major prize.

If you’re one of them (and this is by no means an endorsement of any form of gambling), there is a way you might be able to get the edge over your lotto-loving neighbours.

By sticking to numbers 32 to 45 (or 32 to 47, depending on the game) your chances of winning are no greater than picking any other combination.

But in the very unlikely event your numbers do come up, you’ll probably get a bigger share of the prize pool.

Why? Simply because a large number of people use birthdays to pick their ‘lucky’ numbers. By avoiding numbers 1 to 31, statistically, you might not need to share your fortune with as many other winners.

And if you’re giving a lotto ticket as a gift, it’s not a bad idea to buy one for yourself with the same numbers. Just in case they win…

Oh, what happened to Ashley Revell?

Ashley’s lucky numbers came up. The bouncing ball on the Roulette wheel landed on number 7, red, and he doubled his money to US$270,600.

He used his windfall to set up an online poker business which later failed.

Disclaimer: This article is prepared by Tom Ellison. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.