Are you investing or gambling? How to know when you've crossed the line

Buying a hot investment can give you the same thrill — and payoff — as putting money on the roulette table.

Brian Carlton

By 

Brian Carlton

Brian Carlton

Contributing Writer

Brian Carlton is a freelance writer and editor based in Virginia. He covers housing, finance, and other topics. 

His work has been featured in national and global outlets like NPR, The Associated Press, and the BBC. 

When not at work, you'll likely find him planning another trip. An avid traveller, Carlton someday hopes to visit every continent. He's halfway to that goal. 

Published March 3, 2022 | 4 min read

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when is investing gambling

Investors poured $30 billion into the crypto industry in 2021, with $7.2 billion coming from the U.S. [1]  Companies pitched everything from crypto-enabled games to startups handling digital collectibles. Countries got involved with promotion as well. In September, El Salvador became the first country to declare Bitcoin as legal tender. [2] Cuba has also embraced digital currency. [3] With all this interest, the market value for Bitcoin hit an all-time high in November. 

But that’s where things shifted. On Nov. 10, Bitcoin’s price stood at around $65,000. By the end of January, that price had dropped to $35,000, a typically wild price swing for digital currency. But Bitcoin isn’t the only risky bet investors can make. Everything from vaccine stock to a potential SpaceX IPO has people interested in making a quick buck on the markets. But are these sound investments? 

Apps like Robinhood and lower trading fees have made making quick bets on the market easier than ever. And trendy investments like meme stocks, IPOs, and cryptocurrency have raised the tantalizing possibility of earning lots of money fast.

Buying a hot investment can give you the same thrill — and payoff — as putting money on the roulette table. So what separates a gamble from an investment?

FOMO investing

The answer comes down to one question: Why are you looking to buy? Are you coming in with a plan or reacting to something on your social feed? Financial experts warn FOMO can be a trigger for making hasty decisions with your money, whether it’s buying an outfit on Instagram, or chasing a dubious stock tip. 

“Fear of missing out can get investors into trouble,” says Ben Barnhart. The Michigan-based owner of Barnhart Wealth Management points out that by the time a trendy investment pops up on social media, the initial situation has already come and gone. You’re reacting, rather than planning. 

“It stimulates the desire to ‘catch up’ to a foregone opportunity,” Barnhart says of FOMO. “As you can imagine, this creates an issue. Taking outsized risks doesn’t always yield outsized returns.” 

That’s what Barnhart and other experts want to make clear. Those “big wins” that go viral often come from luck, rather than skill. If you follow the exact same path, you’re not guaranteed the same or even a similar result. 

Both Barnhart and fellow certified financial planner Ashton Lawrence use GameStop as an example. At the time GameStop seemed to be a troubled company. In a world where you can digitally purchase games, what's the long-term value of a brick-and-mortar store? 

Trader Michael Burry, made famous by “The Big Short,” first bought shares in GameStop in 2019. In early 2021, He publicized the opportunity for investors to engage in a “short squeeze,” or bid up the stock price so short sellers would have to keep buying shares to cover their losses. 

Retail investors, hearing about the opportunity on social media, hopped on the trend, driving the price to over $300 at one point. While Burry and the earliest investors earned quick and returns, most got in too late to see a substantial return. The stock has since fallen to around $100. 

What to consider before investing

So how do you know if you’ve crossed the line from sound investment to gamble? 

Consider the example of a potential SpaceX IPO. The first-day returns of a new IPO have averaged 18.4% percent from 1980 to 2020. [4] After five years, however, about half have negative total returns. [5]

“Consider your time horizon,” says Ryan Ortega, the founder of California-based Third Line Financial Planning. A piece of SpaceX could become very valuable when it goes public, or it could not. And as a new stock, its long-term performance is uncharted. 

“Investing is done over decades, not weeks, months or even years,” Ortega says.

The short-term performance of most investments is unpredictable, driven by the emotions of investors as much as the performance of the economy. Because of that, Cooke Capital’s Haley Tolitsky says to ask yourself one question: Do you believe in the investment’s financial future? 

You can apply the same framing to any investment. Do you trust Bitcoin to rise back above $68,000 within five years? Where will Ethereum stand a decade from now? If you haven’t thought about the long-term value, that’s a sign that you’re gambling. 

Leibel Sternbach, founder of Yields4U, says you should ask yourself before buying an investment: What’s the potential upside and downside? How will you mitigate risk? How long will you hold the investment? These are conversations worth having with a professional financial advisor, if you’re struggling with them on your own. If your answers are murky, you may be chasing a risky bet, rather than a long-term investment. It could pay off, but it could also lose big.

 “You may be a skilled gambler, you may be a lucky gambler, but you are still a gambler,” Sternbach says.

Image: Thana Prasongsin / Getty Images