Imagine waking up every day and “working” by putting your hard-earned money at risk. Taking into account various statistical trends and probabilities, your job is to parlay an initial stake into profits using nothing but your wits and moxie. Your odds of success will vary wildly depending on the day’s circumstances, swinging to your favor, against you, and back again seemingly on a whim.
And all the while, even when you’ve made the perfect play, your eventual bottom line will largely be determined by variables far outside of your own control. That routine may sound like the life of a professional gambler, but I’m actually talking about investors who earn their living through the trading of options, currencies, and stocks.
Whereas gamblers must beat the house to make ends meet, investors and traders are tasked with beating a similarly fearsome foe – the market. In both cases, knowing how to determine the exact ratio of risk to reward separates winners from losers. And for gamblers and investors alike, massive gains can be realized when the perfect storm of circumstances happens to arrive.
In the eyes of most, gambling occupies a lower rung on the social ladder than investing – even though the casino floor and the trading floor serve essentially the same function.
That link becomes tangible when you consider the long list of former Wall Street impresarios who have transitioned into the professional gambling lifestyle.
Just ask Andy Frankenberger, a former equity derivatives trader who worked for BNP Paribas and JP Morgan during his investing days. After becoming disillusioned with the Wall Street grind, Frankenberger began dabbling in the tournament poker scene. There, he soon realized that playing poker for a living had several common links to his previous career.
Here’s what Frankenberger had to say about the similarities between poker and investing during an interview with the Wall Street Journal back in 2012:
At the time of that interview, Frankenberger had just put the finishing touches on a masterful year on the felt. He took down not one but two titles in Season 9 of the World Poker Tour (WPT), earning the WPT Player of the Year crown in the process. And between 2011 and 2012, Frankenberger added a pair of gold bracelets at the World Series of Poker (WSOP).
All told, Frankenberger has amassed more than $3.4 million in live tournament earnings since ditching the investment portfolio to become a poker pro.
And if you ask Pascal Leyo – the former head of derivatives trading for BNP Paribas, and the man who eventually brought Frankenberger along with him to JP Morgan – moving from the world of big banks to big bluffs was a natural fit:
The poker world is home to several stories that follow the same template, with successful investors like Bill Perkins and David Einhorn thriving on the tournament circuit.
But the link between investing and gambling isn’t limited to poker by any means. As you’ll learn throughout this page, top-tier blackjack players have gone on to build immense fortunes through their investing prowess. Meanwhile, many of the world’s top investors use the negative expectation involved in gambling to teach students about sound money management.
That’s exactly how billionaire investor Warren Buffet – the man who built Berkshire Hathaway into the world’s most consistent financial services company – taught his own children to evaluate risk versus reward:
Clearly then, gambling and investing can go hand in hand depending on your area of interest.
On that note, let’s dive into three especially prevalent forms of investing – options trading, foreign exchange (Forex) markets, and the stock market – to see whether these economic engines really do compare to casino gambling.
How Options Trading Is Like Gambling
Frankenberger specialized in derivatives trading during his time on Wall Street, and one of the most common forms of derivative securities are options.
An options trader obtains the right to either purchase or sell various assets for a predetermined prize at some point in the future. These assets can be real estate contracts, stock portfolios, or commodities like steel or timber. Options can come in various forms, but the trading of them revolves around the basic principle that investors can acquire the right to purchase assets at a fixed price down the road.
In case that explanation isn’t quite clear enough, this is how the Investopedia resource site defines options trading:
If you’ve ever watched the classic comedy “Trading Places” (1983) – which stars Dan Akroyd and Eddie Murphy – you’ve already experienced options trading in action. The film’s climax involves a complex scheme whereby Akroyd’s “Winthorpe” and Murphy’s “Valentine” conspire against their villainous bosses. And as this informative profile spells out – spoilers included – trading options related to frozen concentrated orange juice on the commodities market can make you rich in a matter of minutes.
To better understand the links between options trading and gambling, think carefully about how options expert J.P. Bennett described the endeavor during a segment of the Industry Focus podcast:
If you think about what Bennett is really saying in that passage, options trading becomes a close cousin to strategy-based gambling games like blackjack and video poker.
In these games, players have the power to make decisions – hit or stand in blackjack, hold or draw in video poker – that have a direct influence on the eventual outcome. Sure, luck is still involved in the short-term, but as Bennett observes, using an inferior strategy over the long run is a surefire recipe for bankroll disaster.
The most successful blackjack and video poker sharps “target consistent winners” by mastering the game’s optimal strategy. In decision-based games, players will always be presented with a series of options, but only one will be the mathematically optimal play. The folks who know how to make that perfect play every time out will weather the swings of variance much more consistently than those playing by gut instinct alone.
When Bennett refers to generating gains in “a much safer, low-risk manner,” he’s furthering the connection between options trading and skill-based gambling.
While most recreational players dabble in games that boast a high house edge – such as roulette (5.26 percent) and slots (7-10 percent on average) – winning gamblers stick with the best bets available. To wit, blackjack offers a low house edge of just 0.50 percent when you play with basic strategy, while video poker games like Jacks or Better can go even lower (0.46 percent).
Vanessa Selbst grew up with an options trader for a mother, but she eventually settled on a legal career before diving headlong into the world of professional poker. Selbst quickly soared to the top of the industry, becoming the world’s highest ranked tournament player, while dominating the high-stakes cash games online in her spare time.
Today, having banked more than $11 million in tournament earnings alone, Selbst is once again making a career change – but this time she’s following in her mother’s footsteps.
After “retiring” from professional poker last year, Selbst took a position with Bridgewater Associates, one of the world’s largest hedge funds with more than $160 billion in assets under management at the moment. You can read more about Selbst’s journey from high-stakes poker to high finance here, but suffice to say, she’s leaning on her prior experiencing managing risk to guide her at Bridgewater.
Here’s how she described her new job duties during a recent interview with the New York Times:
You might’ve noticed Selbst’s use of the word “players” near the end there, and one would suspect that’s not a mere slip of the tongue. As she made clear, investing on the highest levels involves many of the same skills used by elite poker pros. Anticipating multiple outcomes, planning for contingencies, and attempting to “read” the market helped separate Selbst from her foes on the felt – and she’s hoping they apply in the heady world of hedge fund management as well.
Selbst became interested in Bridgewater at the behest of Galen Hall, another immensely successful former poker pro who left that tables to earn his MBA. Hall realized early on that his poker skill set would help him excel as an investor, as he revealed to the New York Times in the same profile:
How Forex Trading Is Like Gambling
Whenever you exchange U.S. dollars for pesos in Cabo San Lucas, or Euros in Brussels, or any other foreign currency for that matter, you’re dabbling on the fringes of the Forex market.
Forex is short for foreign exchange, and this method of trading revolves around the exchange rate between two currencies.
Here’s how Investopedia defines Forex trading:
Essentially, even with very gradual shifts in value that occur over long periods of time, currencies can be used as an investment vehicle. At the moment, one U.S. dollar is worth 0.77 of a British sterling pound, so your $100 investment would net £77. But if you hold onto those pounds for a year, and the value of a pound increases relative to the dollar, selling them on the Forex market would net you a tidy profit.
That’s obviously a simplified example, but big banks, hedge funds, and even national governments routinely make massive investments in Forex. Up until the internet age, Forex trading was the sole domain of these institutions, but the online world has given rise to a new generation of individual Forex investors.
Warren Buffet, the billionaire investing guru behind Berkshire Hathaway, doesn’t focus his immense assets on Forex trading like he does corporate acquisitions and stocks, but he does dabble here and there. And when asked about the concept of investing in currency fluctuations, he offered a typically pointed reply:
Buffet’s words of wisdom can be applied to the entire casino gambling industry. In every game on the floor, from blackjack to baccarat and everything in between, the house holds an inherent edge.
Knowing this, you can consider your bankroll to be a currency of its own. As Buffet warns, this bankroll will depreciate over time, like all currencies do. The big question, then, is exactly what Buffet asks – where will it depreciate the least.
These cold mathematical facts make gambling and Forex trading birds of a feather. In both pursuits, the objective should always be to follow Buffet’s lead. By pursuing the currencies or games that will depreciate the least, you’ll preserve your bankroll over the long run – allowing for further opportunities to collect a profit over the interim.
How Stock Market Trading Is Like Gambling
The most approachable method of investing for average Americans is the stock market. Trading stocks boils down to purchasing shares of a publicly held company. Startups and struggling firms have lower stock prices, but as they grow and capture market share, the value of their shares will rise in kind.
Back in 1985, Donna Fenn bought a few shares of stock in a tiny computer company called Apple on a lark. Today, as Apple becomes the first American company to achieve a $1 trillion valuation, Fenn’s investment has increased in value by an astounding 50,000 percent.
Fenn’s windfall isn’t the norm, of course, but neither is triggering a major progressive jackpot on a slot machine like Megabucks. When you purchase shares in a developing company, the investment can rightfully be viewed as dropping a nickel into the slots. You’re simply purchasing an opportunity, one that can result in a loss or a win depending on a little luck.
Using sophisticated computer analysis, Thorp perfected the first “point” system used for counting cards in blackjack. In his seminal book “Beat the Dealer: A Winning Strategy for the Game of Twenty-One” (1962), Thorp provided millions of readers with the optimal strategy and card counting methods needed to turn the house’s edge upside down.
Thorp went on to use his expertise in probability theory and analytics to construct an algorithm used for identifying price anomalies in the securities market. Once again, his book “Beat the Market: A Scientific Stock Market System” (1967) revolutionized the way sharp thinkers make money.
Thorp is still at it today, managing a multibillion dollar hedge fund while continuing to innovate in the world of investing. And as he told Market Watch last year, those abilities stem directly from his history as a blackjack pro:
When you venture into stock market trading, you’re essentially betting on yourself – just like Thorp and the legions of card counters he created do at the blackjack tables.
Losses will always occur, but over the long run, the best investors and gamblers alike – the Buffets, Selbsts, and Thorps of the world – manage to create more winning situations than losers.
It’s amazing how options, Forex, and stock trading are all legal, but casino gambling and sports betting aren’t in many areas. Progress is slowly being made, so hopefully it all will be considered equal.