Line Your Own Pockets

Michael: 00:00

All right, everyone. Welcome to another episode of Line Your Own Pockets. This is a question from a user, but it's generic enough of a question that I think both of us have probably gotten this countless times throughout our careers, but I think it will make for a really interesting kind of back and forth and conversation when we get into the nuances of things, which is always where the most fun lies. Dave, take it away. Why don't you the question that we are right.

Dave: 00:26

So Yeah, it's a simple question. Is trading gambling? And, yeah, it's something I've thought about a long time. You know, I'm a poker player. I have a home poker game that we play every month.

Dave: 00:43

So it's something I think about. When we first came up with this topic, my guess was that, Michael, you and I are going to agree on this. But since I've talked to various people about this, a lot of the traders I coach, I've asked them this question. I mentioned it at my home poker game that was last this past Sunday. I'm not sure we're gonna agree.

Dave: 01:09

I'm not sure. Like, there was a wide variety of opinions that way more, a bigger variety than I thought.

Michael: 01:17

Oh, that's interesting. Okay. So first, I think a funny story and I just got back from a trip to Toronto, a little trader meeting with a bunch of people. And someone was mentioning that they get this question and so many other questions if they ever introduce themselves as a trader or an investor so much that he just says plumber from now on. And that's just just does not even wanna tell people what he does.

Michael: 01:43

So, know, he goes in, you're filling out a form. What's your occupation? He just says plumber and just hands it to him because it's just he's like, no one asked me any questions if you follow-up. I said you could probably do the same with accountant. No one's gonna ask any questions, but, it's funny that you know these kind of, you know, I think there's probably different answers depending on how deep in this you're going.

Michael: 02:07

But, yeah, I just I guess just to answer right off the bat, I think yes, but is gonna be a lot of the answers. Right? Because, you know, not without getting, like, too meta with it. It's like, isn't everything gambling? Like, crossing the street, there's probability that it's gonna end poorly for you.

Michael: 02:24

So so I don't think and unless you have a different answer than I'm thinking. I don't think the interesting answer is yes or no. I think the interesting answer lies in the, like, what do you define as gambling? And then, you know, what is it that you know, I know there's negative connotations with it. But, you know, getting into that that nitty gritty detail, I think, is where the fun's gonna be.

Dave: 02:46

Yeah. So So I brought this up at the poker game. I thought everybody was going to agree with what I thought or what I assumed, but I was totally wrong. Everybody thinks poker, or at least everybody that's playing at the table there, everybody agreed that poker was gambling. I didn't quite think so.

Dave: 03:11

Think a crucial distinction is, do you have an edge? If you have an edge, then I don't think it's gambling, or I don't consider it gambling.

Michael: 03:21

Well, and this is why I think definitions are important, right? Because is the casino gambling, I guess, is is the question. Right? Because they're the ones with the edge versus the person that walks into the casino. And and I think you could you could make an argument for either way there.

Dave: 03:40

Yeah. And I think So one of the guys in my poker game, great guy, been playing poker a long time, a good player. He said basically what his definition was basically anything involving money and chance is gambling. And in fact, he put starting a business in that category. He said that's totally gambling.

Dave: 04:07

Okay. Which I was, I couldn't quite, it really it took me a while to come around to that or to understand where he's coming from. Just because I think I feel like having an edge is such a crucial part of whether it's gambling or not, because I know that there have been times in my trading where, gosh, if I feel like I don't know if I have an edge with what I'm doing or if I feel like I'm fooling myself that I have an edge and maybe I really don't and I don't realize, that makes me uneasy. And that it feels like it feels like gambling where I don't have an edge or I don't know if I have an edge, then That gives me pause and makes me very uncomfortable.

Michael: 04:59

Okay, so there's I think there's a couple of things to unpack there. So I'm probably more with your buddy who I think. So, again, it's both definitions. Right? I I just think anything that is probabilistic in nature, you could probably define as gambling.

Michael: 05:16

But you're looking at it as another way around where the less less you know the outcome, I guess is more gambling in your mind or the less you can define the outcome is that kind of where you're defining it because you're saying if I'm doing something that is, you know, a way that I can't prove or something that I can't understand, that's not gambling. But the way I look at it is that, you know, with anything I I kind of like the idea of anything that's probabilistic that it has to do with money is probably also gambling. But my immediate thought when you said that is like, could say that about a job. Right? Chance every day you walk in, you're gonna get fired.

Michael: 05:53

So there's some some probability there as well. So, yeah, really, I think nailing down kind of the definition in everyone's mind is is like step one there.

Dave: 06:02

Yeah. And I think a lot of people it's easy just to make an argument that pretty much anything is left to chance. Like we said, crossing a busy street, there's some risk there. One so one of the traders that I coached said, he put it this way, Even walking around in a bubble, you could get hit by an asteroid, so there's a non zero risk of ruin just by waking up every day. But if that's your definition, then okay, if that's your definition of gambling, then everything is gambling, which means nothing is gambling.

Michael: 06:38

It's funny.

Dave: 06:39

Think it's important to nail down the definition.

Michael: 06:42

This might surprise you, Dave, but I did a lot of debate in school. And this just reminds me of like when real get we used to call it like debate bro. When you go like real deep into the debate, like eventually, if you debate someone on like philosophy enough, nothing matters and you might as well just go, you know, take a walk off a cliff. But yeah, so I think the definition again is really important. So while you're talking, I just asked perplexity and it said, gambling is the act of wagering something of value such as money or possessions on an outcome of a random event.

Michael: 07:15

So, right, then it's like, okay. Well, what is random? So is I could almost make an argue that every trade is a gamble, but maybe a culmination of enough trades over time is no longer gambling, assuming that there's some sort of edge that you can you can kind of hone out on it, where we cannot predict. It's random what any individual trade will do, but with enough testing and enough data over time, you should have some convergence on some known edge or ability there. So I could see that being kind of conflicting definitions.

Dave: 07:53

Yeah, I think the point about random, a random event, is I think accurate. And I think that plays into way I think about, okay, does this have an edge? Yeah, you're right. Any given trade may be closer to random, but yeah, in the long run, an edge is very likely to play out the stronger it is. I like that definition because most people When I brought this up at the poker table and said, Yeah, this podcast topic is going to be, It's trading gambling, but let's talk about poker.

Dave: 08:32

They said, Oh yeah, well, trading is definitely gambling. I think most people would say that. Most people who weren't involved in the trading industry, weren't serious traders, or maybe even just hobbyist traders. But I think the real interesting people to ask this is people that are trading for a living, people that do this beyond the hobbyist level. They know they have an edge.

Dave: 09:02

Is that gambling? I think that's the more interesting question.

Michael: 09:07

I think a very interesting question to bring to the same audience that right. Okay. You know, trading is definitely gambling is is like investing in the S and P 500 over the long run gambling. Right? Because the way I look at it is is the S and P 500 is simply a system of long term trading or investing that just says the larger your market cap, the more impactful you are to the economy.

Michael: 09:37

Therefore, you know, the more you should be invested in. But I would bet that you would get a different answer based off of that if you went, okay, the right is trading gambling, right? And I would almost bet that you probably for most people, the shorter term nature of the trading would make it more apt to be gambling. So I wonder if it's that or if it's just pure, you know, media, you know, what they've heard in the media or seen in movies heard stories about over time whether or not something is defined as gambling or not?

Dave: 10:13

Yeah, I think it's I think there's, if you have a skill and a and a a or the an activity is skill based. I I think that's an important part of it. Another thing that find another quote here from another trader that I coach. This guy's, brought him up on the podcast a couple weeks ago, Leo. He's a sharp guy.

Dave: 10:44

He's he's been doing this for a living for some time. He says, okay, if I went to work for Citadel, people probably they may not think that's gambling. But because he's doing this alone in his house, people might be more likely to call that gambling. I think it's probably because people that have messed with the stock market, dabbled in it in a non serious way, yeah, their outcomes are going to be random. Actually, not even random.

Dave: 11:21

They're going to lose money. That's a lot of the experience that people have. So an important part was whether he's doing this on his own or not. So that I thought that was interesting. I that's not something I would have thought about before this.

Michael: 11:37

Is it that he's doing it on his own or is that the income stream would be different? Because if he's doing it with Citadel, then the idea is that you, you know, you have a job and you have a a paycheck and then, you know, probably some sort of bonus structure or split or something based off of, performance. So that to me is is probably where I think the whole gambling comes from is that, you know, you go into work and you sit down and you make x amount of dollars per day. Whether you're salaried or or, you know, hourly, it doesn't matter. This is this what you make every day.

Michael: 12:10

I think part of the difference there is that some people know, they look at that consistency of returns, I guess, as gambling. So maybe they would even then at that note consider buying stocks gambling, but buying bonds not gambling. Maybe it's, in people's mind, it's frequency and consistency of return or output, I guess.

Dave: 12:35

Yeah, that could be. Yeah, I think there's something where the element of chance is more obvious. I think most people would consider that gambling. There's an element of chance whether it's known or not in various parts of life, but it's not on the surface. You don't think of having a job as being up to chance or a risky endeavor.

Dave: 13:05

That's just sort of the norm.

Michael: 13:08

So I guess the the next question now that we've, you know, we've kind of hammered out some definitions is, do we think that this is actually holding a lot of people back? Like, so imagine somebody goes into the market with this preconceived notion that it is gambling. Aren't they almost as doomed to failure at that point? Isn't that just, like, a 100% chance that if you go in thinking what you're doing is gambling and you define gambling as that kind of random outcome. So I'm gonna buy a stock, and there's a random chance of whether or not I'm gonna make money on it or not, and they're not approaching it, you know, more systematically or or, you know, you know, testing things or proving things.

Michael: 13:48

Wouldn't that framing of mind just be like, okay, well, I just wouldn't recommend you getting involved here at all because you're approaching it this way?

Dave: 13:57

Yeah, maybe. I see people that are definitely doing it for a thrill and they're not doing it to exploit an edge. They're doing it for the thrill of the ride. And you can kind of see that in the way people talk and the way people react to trades, react to losing trades, react to winning trades. And I think that's an important thing to recognize in yourself.

Dave: 14:30

That kind of person is needs I think they have to overcome that mindset to be a good trader for sure.

Michael: 14:39

Well, and I would argue that, right, someone who's like that probably unless they're really, really on the wrong path and they just need someone to grab them. I don't know if there's anything super necessarily wrong with the hobbyist, right? The guy who, you know, and he's never going to do it for a living, but I don't, you know, say you're someone and you just most of what you do is you take your paycheck and you put some in the S and P 500 every week, and then you want to, you know, take a couple thousand dollars and, you know, play with that, whatever. I kind of look at that the same as like sports bettors, right? And there is the same, you know, I I would argue there's probably not nearly as much of an edge in sports betting, but there are people who take it really, really seriously, and they're running numbers and doing statistics and doing all this.

Michael: 15:26

Then there's just the guy who just wants to open up his DraftKings account and have a beer and and, you know, bet on his team. And I would I would say it's the same thing as a split. And, you know, no judgment on whatever you're gonna do, but just that guy who just is gonna bet on the Cowboys because he likes them and has always liked them. I don't think he's under the delusion that he's going to be a professional bettor, the same as someone who is buying a quantum computer company because they think it's going to triple is going to be a professional trader. Maybe they get lucky and hit it big or probably not.

Dave: 15:58

Yeah. I think that's you know, the the the sports betting in this situation you described is doing it for entertainment. And I think a lot of people recognize that they're they're doing it for entertainment. They know they are no under no delusion that they're going be doing it for a living. What they can get an edge but it's still fun and it's.

Michael: 16:18

Yep.

Dave: 16:19

As long as it's not a problem for them and they're having fun, then, there's absolutely nothing wrong with that. I mean, that's that's a worthwhile activity. You know, even if they're losing money, they're probably making up for it in fun and entertainment that they have.

Michael: 16:36

And it's funny that Robinhood, you're going to be able to do all of that. I don't know if you read that, that they're putting in prediction markets into the app, so you're going to be able to bet on crypto and sports and stock markets at the same time. So for that person, I would argue trading is gambling, right? If you're just hearing from a buddy that quantum computer stocks are great and you're dumping a bunch of money in it and you're doing it for this is gonna be fun with the possibility that I hit a home run here or didn't double or triple or quadruple my money. That guy, I would say, is definitely gambling.

Michael: 17:11

So as we're going down this road, I guess we can kind of split. Is trading gambling? Well, maybe it depends on how you're approaching it.

Dave: 17:21

Yeah. And I think the right way to approach this is some humility about whether you're gambling or not. And that can be highly motivating. Mean, I was speaking before, like sometimes I get into a situation where something that I back tested that I'm really sure about, I start trading it for a while and I see the results. You know, look at back at the back test, it looks good, but something's missing or something's just not quite playing out right.

Dave: 17:55

And there are points where I think, is, am I fooling myself? Am I, is this essentially gambling with this particular strategy? That provides a lot of motivation for getting to the answer there and figuring out exactly what my edge is, if any, in a certain strategy and to dive in and make sure without a shadow of my doubt that I have an edge in that situation, or at least as close as I can to a shadow of a doubt.

Michael: 18:26

Well, and I would go even further and say most traders, especially new traders, aren't even doing that. Right? Most traders are, you know, watching a couple TikToks or videos or something, or they learn about some indicator or something. They go in, they apply that for a couple days, and it either makes money or not, and they don't even really know that they're gambling. They're just more looking at, I was told that this moving average system worked and then and then went from there.

Michael: 18:53

So I'd say there's a couple probably red flags to tell yourself right off the bat if you're gambling, that would just be, are you back testing and implementing a system and recording those trades and doing that kind of work? Or are you just someone who comes in and you said, Oh, well, I heard most gaps fill. So I'm going to find things that are gapping and right? It's what level of systematic approach. And this is even for discretionary traders who never want to let a robot trade for them.

Michael: 19:22

But are you doing the things? Like, do you do you understand your edge? Are you testing it? Are you recording it? Are you doing that?

Michael: 19:29

So if we talk about this as, you know, maybe on a spectrum from gambling to not gambling, you know, you can exist in different places. The guy who just walks in, hits a couple buttons every day and hopes he makes money, right? That guy's gambling. And the guy who's has a robot placing every trade that has been back tested and he's been, you know, recording the trades and doing the reconciliation of the gout, I'd say he's on the complete other end of gambling. And then most traders are probably somewhere on that line on that spectrum.

Dave: 19:58

Yeah, I think that's totally true. Yeah, I think an important part of the definition for some people, in fact, one of the traders mentioned this is you have two groups of people. Let's say you got the casino and you got the players at the casino playing a game that where the casino has an obvious edge. Well, if you're choosing to label one of those as gamblers, it's not going to be the casino. They have a huge edge, but it's not a perfect edge.

Dave: 20:35

But if you're going to choose one group to call gamblers, it's the ones that don't have an edge. The ones that are looking to try to get lucky. And with the level of chance in the game, like trying to win the lottery, that's a you can't have an edge in the lottery. Right?

Michael: 20:54

Yeah. And I I think there's a certain the the difference, I think, is that the gamblers that walk into the casino generally know that. You know, just like we talked about the sports gambler or the guy who's just YOLOing. They they know they're going into it with no edge. I think the difference with trading is that there's enough content out there of people that just say, you know, we have this magic moving average system, and and, you know, they're just their edge is kind of trust me, bro.

Michael: 21:27

And they're going into it thinking that there actually is an edge there and then figuring out it's wrong. I guess the same example is there's probably the same I'm not a big sports guy, but I bet you there's the same thing in the sports side of things where there's, you know, gurus in the sports betting who say they have some magic system and if you bet my way, you'll end up making money. So for those people, they are gambling, they just kind of don't know it where the the other side of it is, at least when you walk into the wind in Vegas, they're not trying to hide it on you. It's like, here's your slots, go have fun, right?

Dave: 22:04

Yeah. Yeah, I think the scariest thing would be to think you have an edge where you don't. I think that would be, for me at least, that keeps me motivated. That keeps me looking closely at things, keeping track of that. That's sort of why I'd say that's probably motivates a lot of what I do is a fear.

Dave: 22:30

I think a healthy fear, something that's going to keep you motivated to look for the next strategy to verify that you have an edge in the strategy you have.

Michael: 22:40

Well, we talk about it all the time that trading the way we do it is a little bit more like the scientific approach, where we are trying to constantly disprove a theory as opposed to prove it. Right? I think that this will be an edge of the market, but I'm gonna work my hardest to kind of poke holes in it. And and if it stands, you know, paper trading and live trading small and all of these things, then that'll end up going. And if you hear actual scientists talk, that's kind of how they they speak.

Michael: 23:09

They go like, recently, I don't know if you paid attention, but they discovered potential life on Mars. And then I watched a whole thing about how it is and then all of the things they're going to do to try to prove that this thing that they found was necessarily something else. You compare that to the news articles out there that's like, oh, we found aliens. No, we may have found a small microbiome, like, on cross. And it's the same thing with trading is I say that, you know, that you can kind of detect those people the same way.

Michael: 23:40

The ones who say, I have a thing, and this thing is definitely gonna crush the market all the time, and it's gonna be fantastic. That's the right, the no edge crowd and the edge crowd is, oh, I think I found this something and I'm gonna try tweaking it a little bit. Yeah. Is kind of working in this market, but you know, I don't know how long it'll work, that kind of thing. So there are ways to detect that out there of which of those are gambling and not.

Michael: 24:02

And I think this is a really good not to date the podcast too much, but I think this is a really good time to do this podcast because I know Dave doesn't know this because he doesn't look at a chart outside of a like a one minute degen chart. But if you've just FYI, Dave, we've been in a screaming bull market and everybody is getting rich right now. And I've seen a few of these in my time, not too many, where it seems like this kind of more predatory behavior will continue to grow because someone could post here, I'm up 200% this year and be legitimately correct, but it's not because they have an edge in the long run. It's because you could buy anything right now and hold it for a couple days and end up making money.

Dave: 24:47

Yeah. Yeah. Yeah. I think your point is a great one there where I I don't I wish I had the quote, but there's something it's a quote something like, you know, amateurs are confident and pros have humility. So a couple of the guys I work with, one is is been around a long time.

Dave: 25:08

Just makes this if anybody has edge, it's this guy. And he's like, yeah, I face I'm one mistake away from the risk of ruin every day. If I get too stubborn with something I do, if I make a mistake, yes, I face the risk of ruin every day. And another guy who's been doing this a long time, he's trading for a living, he's doing really well, but he admits, yeah, this could all go up in smoke at any time. You definitely see confidence among amateurs and hobbyists.

Dave: 25:48

Among the pros, you have this very healthy humility in their attitudes about it.

Michael: 25:57

Well, yeah. And it's you know, we all know that these guys who are making just tons of money just YOLO ing, you know, the crazy stuff out there that will eventually, when the when the song comes to an end and then the market changes, they'll have that problem. But, yeah, my worry is that the people who just kind of leave it. It's just way easier to convince people now that you're really good at what you do when Yeah. You know, when the market goes up.

Michael: 26:22

And, you know, to those people, you know, they'll develop humility, I think, comes in time. Right? I think that's that's part of it as well. There's the malicious side of things, but then there's a whole bunch of people in this market right now who actually legitimately believe that they've figured it out and not that, you know, we're screaming higher every week. And those people, I think I think that's why you get a professionalism or being around for a long time and humility comes at the same time because you've been through this moment where you feel really good and then something comes and takes that from you.

Michael: 26:58

And you do that four or five times, you're like, okay. So I will never figure it out. All I'm doing is playing my small edge the the best way that I can over time. And over time, you know, I'll I'll make money, and I'll be okay.

Dave: 27:10

Yeah. If you don't have humility, the market will create it for you soon, right?

Michael: 27:17

Yes. Yeah. It's the whole, you know, the market can stay irrational longer than you can stay solvent kind of thing. Yeah. It's just, right?

Michael: 27:24

It will it will come for everybody eventually. But yeah. So this was this was interesting. It's not a so I guess the the kind of final question, someone says, trading's gambling now. Do you say do you go on a how long have we been recording?

Dave: 27:39

Do you

Michael: 27:40

go on like a forty five minute diatribe? Is there a way that we can kind of succinct? My thing would be, I don't know, I'd say that's why I kind of led with yes, but. You know, it depends on it's all of that that nuance behind it. I just don't know how to, like, succinct.

Michael: 27:56

And I understand why this guy writes plumber on all of his forms now.

Dave: 28:00

Yeah. Yeah. I I think trading does get a bad rap precisely because most people think it's gambling. I think and you know, most people lose money doing it. So I think that's I think for those reasons, trading does get does does get a bad rap.

Dave: 28:19

And yeah, I can tell I can totally understand why the guy says he's a plumber. That's I like that.

Michael: 28:25

Just the dodge of the question, right? And then, you know, sometimes they look at the car he drove up and he says, Oh, I own the plumbing company. That's his way to dispel if they ever like, look at him like, you know, how are you doing so well? So I yeah. I just like I thought it would, this was a a very interesting conversation.

Michael: 28:42

Again, my answer is just gonna continue to be, you know, depends on how you do it. I guess is the best way to to kinda counter it in one line is you sir certainly can gamble at this day. And and I like the the thing you gave the guy who's been doing it for so long where he realizes that if any point he decides to gamble, you know, he can kinda end his career. He could you could be doing this for fifty years, and if you ever kinda slip into that, it is gambling. And then for listeners, it's just to say, just make sure you're not.

Michael: 29:14

Right? Take a hard look at yourself and and kinda go through your process and say, is there any part of this that I'm doing that is a gamble?

Dave: 29:21

Yeah. Yeah. So I think this whole topic was pretty interesting. Like I said, I was surprised at the variety of answers I got. We probably haven't covered them all.

Dave: 29:33

If any listeners have any hot takes that are different than what we said or any traders that we mentioned, I'd love to hear them. Send me an email at davedavemave dot com. I'd love to hear the take or the response. Write it in the comments in the show. We'd like to hear it.

Michael: 29:52

Yeah, I think we're going have a few takes on this one too. When I did some asking around, it's a sensitive topic for some, right? Some will vehemently defend it, but I we some good takes. Think we had the correct take, which we always do eventually. But as always, until next time, I'm Michael Noss.

Dave: 30:12

And I'm Dave May. We'll talk to you next week on Line Your Own Pockets.