East African Business Week (Kampala)
Emin Pasha
15 November 2009
opinion
Found at nearly every casino in East Africa are the popular card games known as Pontoon, Blackjack aka "21", and Poker as well as roulette tables and electronic slot machines.
The above are considered games of chance by most laymen. However, it is not strictly chance that determines the winners and losers at the casino. The rules of casino games are designed to favor the "house" or the casino itself. A fair definition of gambling is, "the voluntary participation in games that put a player at a statistical disadvantage". It is extremely rare to hear of a casino that's losing money or going out of business.
That does not mean that a gambler or punter can't make money playing blackjack or on the roulette tables, but over a period of hours or days the odds will grind that player into a loss position. It is merely a matter of time and statistics.
It takes a very special person to walk away from a casino with winnings - few heed the sage advice of Kenny Rogers' most famous song the Gambler who tells his listeners, "know when to walk away, know when to run!"
Let's examine 3 ways that gambling is very different from investing in shares at a stock exchange.
1. The longer you stay in the stock market the more money you make.
Over the past century only real estate has outperformed the long-term gains of stock markets as an investment vehicle. This is true for markets worldwide. Companies are in business for one reason: to produce profits. Companies listed on a stock exchange are subject to the scrutiny of market regulators, the investing public, and are held to an extremely high standard of transparency. In order to keep their jobs, management has an incentive to deliver positive long-term results. By contrast, the longer you gamble the more losses you will accumulate.
2. Money made from investing in shares is based on company performance.
Investors gain when a company makes profits. Money is made through capital gains (rising share prices) or declaration of dividends to be shared among its shareholders. Investors hitch a ride on the performance of an entire company. Compare this to a casino where any money made is based on luck.
3. Stock markets are designed to help capital grow more capital.
Mobilizing savings from individual or institutional investors is one of the most important roles of a stock market. If an investor's funds are kept in a bank account at 1 or 2% interest or worse if deposited in "mattress bank" earning no interest, his money is losing value to inflation. However, if those same savings were invested in equities or fixed income at a stock market, the capital will be able to grow more capital. In comparison, a casino is an entertainment venue, designed to relieve your wallet of its capital burden.
Notwithstanding the above, many would-be investors still pay undue attention to share prices going up and down and continue to see the markets as a gamble.
I advise potential clients to find a licensed investment advisor and broker/dealer in your market. Arrange a meeting and speak to them about your concerns. The best advisors will take the time to answer your questions and provide you with data showing historical price trends and company performance. This should form the basis for your decision to put money in the markets.
Investing in shares should never be a gamble.
The writer is a stockbroker in East Africa.
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