Combining ‘Gambling’ and ‘Investment’ appears to be bizarre. After all, gambling involves unpredictable risk and the loss of all of your capital in one fell swoop. Investment, on the other hand, breathes the heady air of prudence and safety. This blog challenges these cosy assumptions.
The UK inflation rate currently1 is 3%, which means every savings rate which available in the UK is negative. Prudent savers at HSBC2 for example are paying the bank to save their money. HSBC has many so-called savings products. Their Bonus product pays 0.05% for savings of more than £10,000. This is an eye-watering £5 a year in interest. Loyalty pays 0.05%; Fixed 0.2% and My Savings pays 2.47%, up to £3,000 and then 0.25% for amounts above £3,000.
If HSBC Bonus Savers matched the inflation rate they’d receive £300 p.a. interest instead of £5. That’s a £295 annual loss on £10,000 capital. It isn’t advertised as a negative interest rate because inflation is a dirty little secret carefully concealed.
Where does this leave gambling? I took a betting coupon from BetFred3 as a sample. The assumption is hot favourites usually win. The other assumption is that it’s brainless. BetFred knows more about gambling than you will ever know. Go with the flow.
Short-odds favourites on the coupon ranged from 1 to 1004 to 1 to 12. Two bets met the most severe criteria of 1:100. Both won. Let’s assume £100 is wagered: £200 and £2 won. This looks ludicrous until you remember £200 ‘wins’ 10p per year at HSBC’s Bonus Savings.
Also on the coupon were bets of 1:20; 1:16 and two at 1:12. Placing a £100 bet on these near certainties returns £5, £6.25 and £16.67 respectively and a return of £27.92. Coupled with the £2 from two 1:100 bets that’s £29.92 return on an investment of £600. The risk premium is £29.62 on £600. In brief, that’s a certain 30p per year on £600 or a near certain £29.92 overnight.
The stock market operates on exactly the same principles,
“Market risk premiums (MRP) measure the expected return on investment an investor looks to make. For potential investors looking to add to their portfolio, the perfect scenario for a risk-based investment would be a high rate of return with as small a risk as possible. There are three main concepts to MRP’s, including required market risk premiums, historical market risk premiums and expected market risk premiums.”5
In 2021, the FTSE risk premium is 5.6% per year. The risk is that shares will decrease in value or go bust. For gamblers you either win or lose. As a consequence the risk premium for gamblers must be higher. And it is. It’s very much higher but are the actual risks as fearful as is commonly believed? They are if you’re a punter casually gambling on what takes your fancy. A punter faces stupendous risks and shouldn’t go anywhere near a bookies. Coolly using short priced odds is a different activity. Gamblers aren’t punters.
The risk premium for gamblers is probably excessive in relation to the risks faced. Therefore it can confidently be asserted that gamblers are making an investment when placing very short odds bets. Theseare massively superior to so-called savings products and the FTSE.
Addendum: Premium Bonds
If you can’t stomach the possibility of losing your money instantly then premium bonds are for you. If you’re statistically average you’ll win 1%. If you’re not statistically average you might win a million pounds or nothing at all. But you won’t lose your capital.
1 Inflation and price indices – Office for National Statistics (ons.gov.uk)
2 Savings Account Interest Rates | Savings Rates – HSBC UK 12th October 2021
3 BetFred Longlist coupon dated Friday 8th-Monday 11th October 2021
4 1 to 100 means that for every £100 gambled on a successful bet it will pay £1 as winnings.