A Bet By Any Other Name Would Still Smell Like Gambling

In recent months, Wall Street mania has overtaken the sports betting and daily fantasy world (so has NBA Top Shots, but I can only handle one thing I barely understand at a time, thank you very much). But yes: Many of the Twitter accounts of my favorite sports gambling and DFS players have been littered with stock talk, especially since the GameStop saga. 

And sure, I get it: The center of the Venn diagram between sports gamblers and stock market investors is probably pretty damn robust. When there’s money to be made out of thin air, people who try to make money out of the thin air over here are likely to head over there to try and do the same.

Of course, we’re talking about two different things, namely gambling and investing. But more and more — and again, especially in the market’s current climate, where Reddit boards are shaking the industry and penny stocks rise and fall in head-spinning percentage moves — the line between “gambling” and “investing” is thin, very thin.

But don’t trust me: Trust Alok Kumar of the University of Miami, Thanh Huong Nguyen of The University of Danang in Vietnam, and Tālis J. Putniņš of the University of Technology Sydney as well as the Stockholm School of Economics. They are the authors of a recent paper that posits that almost 15% of all stock-market trading in developed countries — and a full third in emerging markets — is full-on, no questions asked, pure gambling.

The trio concentrated their study on so-called “lottery” vs. “non-lottery” stocks. You know. Penny stocks that trade over the counter or on the “pink sheets” (watch The Wolf of Wall Street for a more detailed breakdown). And what they found — among other, financial-y type things — is that people like investing in these high-risk, purely speculative stocks. A lot. Like, a whole lot. 

So much so that they estimate 3.5 times more gambling takes place within the confines of (cough-cough) “investing” than takes place in all the casinos, racetracks, and sportsbooks of the world.

Bet, invest, CEO stuff, rinse, repeat

“I don’t know how many zeros were behind the decimal point. All I know is I spent $1,400 on a million shares, and it went to .005 or something, and I tripled my money. I couldn’t even tell you one thing about the company, but I saw in on some message board and bought it. To me, this is pure gambling.”

The above anecdote comes from a CEO of a company in the Northeast that does nearly $50 million in business each year. This CEO — who I personally know, and who would prefer to not be named — is also an avid sports gambler and stock-market investor. He has his long-term investments, his blue chips, his retirement funds.

He also has roughly $50,000 floating around at any one time in stocks with a lot of zeros behind those decimal points.

“It’s expectations. When I bet on a game or bet on a horse, there’s a predicted outcome, there’s only two things that can happen. The over hits, or it doesn’t. The horse wins, or he doesn’t,” he said. “With the stock market, there’s a tremendous amount of variables. I was in a stock recently at nine cents. When do you get out? At 90 cents? All right, you get out at 90 cents, and it goes down to 40 cents, you played it perfectly. But it never ends. 

“The biggest thing as a gambler is that not making money is worse than losing money,” he continued. “I bet the Patriots and they lose, so be it. I buy whatever penny stock at one cent and it goes to zero, so be it. It goes to a nickel and I sell and 5X my money? I’m happy. But if it then goes to $5? I’m miserable. I’d rather it have gone to zero.”

Yep. I think this CEO might be Patient Zero in the Kumar // Nguyen // Putniņš study.

“I’m investing in these stocks purely to get rich,” he said. “If one of these things goes to $10, that’s life-changing money. I’m not making life-changing money at the track.”

Sunday losses, Monday comebacks

“We found that the break-even hypothesis was supported following negative sentiment and losses from football gambling,” said Justin Cox, an assistant professor of finance at Appalachian State University. “Investors apparently used the stock market to offset losses or break even. Particularly, these lottery-like stocks that have a low share price, high volatility, and returns that are highly skewed. Basically, they are using penny stocks with huge potential payoffs to try to recoup their losses.”

Cox, along with Adam Schwartz of Bucknell University and Robert Van Ness of the University of Mississippi, are the authors of a study published last August titled “Does what happens in Vegas stay in Vegas? Football gambling and stock market activity.” The question they asked was relatively straightforward: What happens on Mondays in the stock market following a college and professional football weekend?

Crunching over a decade’s worth of Vegas sportsbook data and the same amount of Wall Street data from various sources, what they found isn’t terribly surprising: Bettors who took a bath on the weekend jumped into the market on Monday — specifically in penny stocks — in an effort to get square. The opposite didn’t hold true, as winning bettors over the weekend did not try to double up in the market come Monday. And furthermore, how someone did in the market did not impact their football betting.

So whaddya say, doc? Sports bettors and penny stock investors part of the same breed?

“I would say so,” Cox said. “That’s at least my inference from the paper that we wrote. I do think there is some type of aspect in which the clientele in sports betting is very similar to what you’re seeing in the market, specifically in these speculative, lottery-like stocks. That’s my inference.”

One notion for a future study, here: As sports betting becomes more and more accessible and acceptable, will that have a spillover into the speculative portions of the stock market? Is that perhaps even happening as we speak? 

In the end, as with most everything, there’s no easy answer. Frankly, I’m not even sure what the question is. But as time ticks by, it is becoming increasingly clear that the term “gambling” is in need of a much bigger umbrella.