Don't Fool Ourselves - We're Gambling
In addition to prevent fraud, the Kansas Act also sought to protect investor with “a merit test” by prohibiting the sale of the securities of any company whose organization, plan of business, or contracts included any provisions that were "unfair, unjust, inequitable or oppressive," or if the investment did not "promise a fair return."
Generally, securities laws are quite similar in this regards globally. In capitalist economy, the legislators are concerned with “national interest” - to ensure economic development and create job opportunities. It acts to protected us “from being made a fool” and in order to encourage us to part with our money for the national good and in our interest. It’s our decision and our right. We can be a fool if we wish. Enterprises can then make use of our money to create jobs, revitalize the economy, and generate more money for themselves and some for us. However we are likely to bear more of the risk. Investing creates value for big corporations, powerful financial intermediaries, and the government through taxation of dividends and capital gains.
Avenue to riches are limited to many people especially the working class.
Many people used to think that lottery was a “tax on stupid people” and those who buy them are suckers. In the survey in United States, the poor spend about the same amount as the rich on lotteries which mean a far greater portion of their income on this losing game. The Survey also found that buyer of lottery products are, contrary to what many people think, aware of the odds and are making “fully-informed purchases.” For most them, it is the only way they’ll ever get rich. Lottery tickets are therefore basically an investment vehicle for the poor. This is collaborated by another Consumer Survey that found that ‘21% of Americans, and 38% of those with incomes below $25,000, think that winning the lottery represents the most practical way for them to accumulate several hundred thousand dollars’.
Bernstein, P. L. (1996). Against the Gods. John, Wiley & Sons, Inc.
By labeling investing as “not gambling” give us a false sense of security. Investing, however, has the best odds than all other forms of gambling.
"It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges." - John Maynard Keynes
Social Stigma
It is a mundane tropic. It have been well covered by investors and professionals connected with the finance industry. Their views were extensively propagated. So it is not surprising that the views of the advocates of investing as “not gambling” dominated current thinking. Receiving less attention are views from the academia and their scholarly papers which in my views are more comprehensive and objective in covering the issues.
From the point of most stock investors, they are not gambling. Investors do not want to be labeled as gamblers with its socially negative connotations. Financial firms go to great lengths to distinguish investing from gambling. The finance industry does not want us to see ourselves as gamblers as it would affect their business.
However some insiders (experts in the finance industry) are more forthcoming. But Aaron Brown, an executive director in risk management at Morgan Stanley, in his book, The Poker Face of Wall Street, argues that the stock market is organized for gamblers; if not, why would the markets be set up for massive minute-by-minute trading when the same economic function could be accomplished by a once-a-day matching of buy and sell orders?
Another guru and insider, Jonathon Hoenig, MD of hedge fund, Capitalistpigs confessed: we gurus blab about Fed policy and price/book ratios to legitimize what most of us are embarrassed to admit: The stock market is little more than a tremendously exciting, highly addictive, real-time, real-money global casino.
“Blue-chip stocks” received their name from the highest value poker chip. Analogies of traditional poker techniques are quoted by experts as applicable for use in the stock market.
I started dabbing in the market in the late 1990s to 2002. I begin active investing again in 2009. This time, I went through numerous books and hundreds of articles in the net to seek a better edge in making money the safe way.
What I read troubled me. Why investing is prevalently perceived as “non-gambling” by investors,
when based simply on conventional wisdom and commonsense, it is obviously more a gamble than anything else? Reading the financial media gave me the impression of investing as something very opportunistic. It aroused in my mind a combination of emotions of chances and dangers very akin to that of gambling. They constantly use allusions to gambling such as “bets”, “play”, “action” with plenty of reference to “risks” and gave lots of forecasting in its reports about the financial markets.
Clear distinction Impossible
The gambling industry projects itself as entertainment to give the industry respectability and a socially accepted utility. The financial industry gave investing the cloak of functionality in provision of liquidity to enterprises and utility of respectable earning.
The academia is generally of the view that it is impossible to distinguish in a principled manner between gambling and investing as the 2 activities are intrinsically similar. The dichotomy of gaming and investing arises out of social values and discriminations. Tom Murcko, CEO, InvestorGuide.com, in his article “What is the Difference Between Gambling and Investing?”, reviewed all the arguments put forth by the proponent of “investing is not gambling” and opined that “While investing and gambling probably initially appear to be worlds apart, the … attempts at differentiation revealed that the actual differences are smaller than the perceived differences, and that there is a significant gray area in the middle.”
Differentiation is “classist”
Historically, perception of gambling is, at best, paternalistic and, at worst, classist. A historical perspective of gambling or investing in early United States shows strong influences of Puritan values and wealth (social class) on how inherently similar activities was perceived differently.
In the 19th Century, gambling is vilified because that it violates the Puritan work ethic. Protestant ministers preached that profit without work was immoral but on other hand, all Christian denomination except the Quaker operated lotteries. This criticism was largely responsible for the disappearance of legalized gambling in the late-nineteenth and early-twentieth century. This moralistic thinking persists till present days.
Their motivation may be less than civic-minded; Chris Hurt propounded this succinctly in her paper Regulating Public Morals and Private Markets of 2005. She hypothesized that gambling threatens social order; with the throw of the dice, a commoner can become a wealthy citizen, a slave a freedman. Gambling is anathema to the Puritan work ethic, but it also violates unspoken values of knowing one’s place and living within one’s class.
Gambling especially by the poorer classes was abhorred and at times prohibited. The first anti-gaming statute in England applied only to poorer working class ie labourer, servants, craft men, shopkeeper. The social class distinction was clearly obvious in horse racing. Trackside wagering was a legal activity for the wealthy who could afford entry fees, but off-track betting on the same race in the same town by the working classes was illegal.
Hurt sees the divergence of views of gambling and investing as discrimination based on the classes of people that participated in these activities and who profited from these activities. The financial industry and the wealthy class participate and benefit from the investing activities while the participants and beneficiary of other forms of gambling are the working class gamblers and bookmakers.
“Other Peoples’ Money”
Hurt further speculated that the banking and securities industry may have spur the moralistic arguments against gambling as it viewed gambling as competing for the limited pool of funds available for speculation.
During the period in the late 18th and early 19th century (the Gilded Age), billionaire businessmen amassed vast financial empires. Mathew Jefferson termed this billionaire the Robber Barons. It was through the tight integration of industry with finance by the Barons cabal forming a “money trust” that they were able to control a vast and growing concentration of money, assets and credits; “by which a few men [were able to] control the business of America.” The financial oligarchs’ power and the growth of power come from wielding the savings and quick capital of others. “They control the people through the people's own money," as described by Left-wing crusader and future Supreme Court Justice Louis Brandeis in his book Other People’s Money in 1913 . Most of these barons are in the railroad industry or in finance which in the 1900 meant almost exclusively railway financing. They were “for the most part more manipulators of finance than builders of new track.”
This lends some credence to Hurt’s speculation.
Farmers considered speculators as scheming gamblers who brought nothing to market but tricks and ruses and crept away with profits to which they had no right. The Board of Trade successfully diverted criticism from speculation per se by waging war on the bucket shops where gambling on commodity futures occurred as bets made outside the stock market proper. Ann Fabian wrote in her book, Card Sharps and Bucket Shops: Gambling in Nineteenth-Century America, “The members of the Board of Trade made the devil the gambler who counterfeited speculation and not the speculator who counterfeited crops.”
Legislations and Investing
In this context, it is not surprising that legislations have treated investing very kindly. The legalization or regulations of investing further the cause in turning it into a socially accepted form of wager.
The Department of Financial Institutions, Wisconsin provides a very interesting historical perspective of securities legislation in the United States. (Department of Financial Institutions)
Registration of railroad securities was required by the State of Massachusetts as early as 1852. Other states followed suit with laws relating to securities in the late 1800's and early 1900's. A more comprehensive securities law requiring registration of both securities and their salesmen was enacted in 1911 by Kansas, in response to unwitting investors being sold worthless interests in fly-by-night companies and gold mines. These assets were imaginaries and backed up only by “the blue skies of Kansas.” State laws regulating securities are often refer to as the “blue-sky laws” till today.
In addition to prevent fraud, the Kansas Act also sought to protect investor with “a merit test” by prohibiting the sale of the securities of any company whose organization, plan of business, or contracts included any provisions that were "unfair, unjust, inequitable or oppressive," or if the investment did not "promise a fair return."
The stock market crash of 1929 enabled the enactment of the first major federal legislation to bring uniformity to the states’ securities laws. The Securities Act of 1933, administered by the newly created Securities & Exchange Commission (SEC), provides for the registration of the initial distribution of most securities.
The law provides for full disclosure of all material facts but not the “merit test” of the Kansas laws. This "sunlight theory of regulation" is based on the assumption that if investors are given all of the necessary information they will make wise investment decisions. It also assumes that securities issuers were sufficient as “those who are forced to undress in public will presumably pay some attention to their figures.”
Observers also looked at the Act as follows: “Congress did not take away from the citizen his inalienable right to make a fool of himself. It simply attempted to prevent others from making a fool of him. “
The announced aim of Congress is to restore investor confidence in the markets by protecting investor against fraud and enterprises against crooked competition. This was to attract capital for investment which would in turn generate job opportunities and restore consuming power.
Generally, securities laws are quite similar in this regards globally. In capitalist economy, the legislators are concerned with “national interest” - to ensure economic development and create job opportunities. It acts to protected us “from being made a fool” and in order to encourage us to part with our money for the national good and in our interest. It’s our decision and our right. We can be a fool if we wish. Enterprises can then make use of our money to create jobs, revitalize the economy, and generate more money for themselves and some for us. However we are likely to bear more of the risk. Investing creates value for big corporations, powerful financial intermediaries, and the government through taxation of dividends and capital gains.
Investing was therefore legalized, just like the lotteries in the 18th century when private brokers were authorised by the state to launch raffle-style lotteries to raise monies for large-scale endeavors such as public education, public infrastructure and private construction projects. Similarly, the federal and state governments have been receptive to progressive efforts to legalize casinos (Nevada in 1931 and New Jersey in 1976) and increasing forms of gambling, which bring in more tax revenue and create jobs.
The concerns of gambling were not in the picture at all in enactment of these security laws. Financial speculation was respectable as far as only the rich and elite were involved.
Puritan Ethic and Risk Taking
It is the same Puritan ethic that contributes to the growth of the spirit of capitalism where “pursuit of profit and forever renewed profit” is most compelling. Taking risk or “gamble” is part and parcel of life. As Peter Bernstein describe so lucidly:
The concepts of thrift and abstinence that characterize the Protestant ethic evidenced the growing importance of the future relative to the present. With this opening up of choices and decisions, people recognized that the future offered opportunity as well as danger, that it was open ended and full of promise. ….. The prospect of getting rich is highly motivating, and few people get rich without taking a gamble.
Since the beginning of recorded history, gambling. - The very essence of risk - has been a popular pastime and often an addiction. (Bernstein, 1996)
Avenue to riches are limited to many people especially the working class.
Many people used to think that lottery was a “tax on stupid people” and those who buy them are suckers. In the survey in United States, the poor spend about the same amount as the rich on lotteries which mean a far greater portion of their income on this losing game. The Survey also found that buyer of lottery products are, contrary to what many people think, aware of the odds and are making “fully-informed purchases.” For most them, it is the only way they’ll ever get rich. Lottery tickets are therefore basically an investment vehicle for the poor. This is collaborated by another Consumer Survey that found that ‘21% of Americans, and 38% of those with incomes below $25,000, think that winning the lottery represents the most practical way for them to accumulate several hundred thousand dollars’.
Conclusion
Judge Bork warned that “the less we know of how ideas actually took root and grew, the more apt we are to accept them unquestioningly, as inevitable features of the world in which we move.”
And as Justice Black once put it, “when precedent and precedent alone is all the argument that can be made to support a . . . rule, it is time for the rule’s creator to destroy it.”2
Our attitude towards investing is shaped by social engineering of interest groups. Legislations convert investing into a socially desirable thing while gambling is an irrational social behavior that is strongly discouraged.
As a result, it is difficult for us as investors to accept that investing is gambling because of the stigma. We would face a lot of social objection from family, friends and associates if the “truth” is finally and generally accepted.
Legislation does not make investing less “gambling in nature” but only give it a coat of respectability which has led many “sheep” to go to the slaughterhouse meekly.
Fiduciary responsibility is scarce commodity and no longer sacred. We, as investors, are in fact facing more dangers from the finance industry than the gamblers are facing from the gambling establishment.
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