THE BLOG
12/15/2015 02:14 pm ET Updated Dec 15, 2016

Sports Betting and Stock Market Investing: Examining the Parallels

Though sports betting often gets a bad name, it isn't much different than investing in the stock market. While the two are not one and the same, it's hard to ignore the many similarities. Both require you to take a risk in order to earn a high return. You could also argue that each requires skill and experience to succeed. So, as an investor, what can you learn from successful sports bettors?

The Relationship Between Investing and Betting

Have you ever participated in a blind taste test? You know, the ones at the mall where there's a booth set up, and they ask you to taste two different samples, and guess which sample is associated with which brand or restaurant? One of the most popular taste tests of all time is the Coke vs. Pepsi taste test. People generally go into the test saying that they prefer one brand over the other, but many discover that they actually enjoy the taste of the competing brand more after participating.

While investors may say that they'd never gamble, and gamblers might claim that investing doesn't interest them, the reality is that the two share many similarities. If you were to give gamblers and investors a description of the two activities without revealing the title -- in other words, a blind study -- you'd likely find that these two activities are essentially interchangeable. Consider the following:

  • Activity A. In this activity, you risk money on a real-life outcome that you can't control. If the outcome is favorable, you benefit. If the outcome is unfavorable, you lose money.
  • Activity B. In this activity, you study trends and risk money in hopes of profiting from a positive outcome. If you're wrong, you lose money. If you're right, you earn a healthy return.

Which one's referring to sports betting, and which one's describing investing? There's no right answer. Activity A could be sports betting or investing. The same is true for Activity B. And, while some people would argue the semantics of these definitions, the simple truth is that each activity requires a certain amount of skill, analysis, risk, and chance.

The point of this article isn't to persuade bettors to invest in the stock market or to encourage investors to start gambling on sports, but rather to prove a point. Investing and betting are similar in nature, and experts from both fields have valuable lessons for the other.

Whereas stock brokers have developed a skill for picking which stocks will succeed in the long run, handicappers make a living out of offering picks and analyzing odds. Both investing and sports betting have created a number of specialized industries.

Investing and Betting: One and the Same?

In recent months, there's been a lot of chatter about the legality of sports betting and whether or not it should be fully legalized or banned. However, this debate is nothing new. As famed economist John Maynard Keynes once said, "It is generally agreed that casinos should, in public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges." In other words, if you're going to ban gambling, you may as well halt investing.

Well, we all know that the government will never ban the stock exchanges, so there's no sense in having this debate. Instead, it's time that investors stop worrying about the legality of sports gambling, and start learning as many lessons as they can from successful bettors.

"When people say, 'buy a company with a strong brand, a wide moat, and good growth prospects', it is like saying one should just bet on Duke to win. It's simply not that easy," writes investor Jonathan Ping. "There is a handicap, but instead of a point spread it is the price of the stock."

Just as a basketball team that's favored to win heavily over its opponent might be required to win by 15 to cover the spread, a strong, reputable company is going to command a higher stock price than a newer, more susceptible one.

"The argument over whether you can get better risk-adjusted returns from picking individual stocks will probably go on forever," Ping assures his readers. "Is it skill? Is it luck? Either way, it is important to know that very few people pull it off over the long term, and I think this analogy illustrates one major reason why."

In his opinion, investors should understand the inherent risks that come with investing, even if they aren't as heavily publicized by the media as gambling risks. "Next time you feel like stock picking, try beating the spread on 10 different sports events first," he quips sarcastically.

Fantex: The Convergence of Investing and Betting

In some instances, sports betting and investing are so intertwined that they're actually the same. For example, Fantex, a brokerage that lets fans buy and sell shares in the future earnings of pro athletes, recently filed papers with the Securities and Exchange Commission. While the offering would initially be sold by investment bank UBS, it could eventually be listed on NASDAQ under the ticker FXSP.

According to ESPN's sports business expert, Darren Rovell, investors will be betting on the future earnings of 10 different athletes. Fantex has purchased a percentage of these athletes' future earnings and allows gamblers -- ahem -- investors to profit from predicting which athletes will perform best -- financially -- in the long haul.

Could Fantex become the middle ground that shows people that sports betting and stock picking aren't systematically different? This'll be an interesting development to keep an eye on. If nothing else, it proves that parallels and intersections do exist between the two.

Never Stop Learning

The moral of the story is that gambling and investing are similar in nature. To judge one and to praise the other is hypocritical. Instead of shaming sports betting, and calling for its demise, investors should begin to look toward expert gamblers to gather insights into what makes them so successful. There are certainly lessons to be gleaned from those on both sides.