Is gambling a good financial investment? Probably not. Most players should view their gambling losses as entertainment expenses. Most recreational gamblers should be prepared to “lose what they came with”. They should ensure that their gambling bankroll does not exceed a reasonable entertainment expense. For most gamblers, their gambling expenditures should compare to a night at the movies or a beer with friends. Anything more is wasteful.
If a gambler knows how to gain an edge on the casino, how much should these “advantage players” devote to their gambling bankroll? Probably a small amount of their net worth. If your net worth is more than $1 million, and you can gain an edge on certain casino games, it might be fun to devote some hobby time to gambling. The casino games you can beat in the long run might include blackjack (by card counting), video poker, sports betting, and hold’em poker. If you’re a millionaire who is confident in their edge over the casino, and you can verify your edge using some statistical method, how should you determine your gambling bankroll?
Millionaire advantage players have the opportunity to develop large gambling bankrolls. But should they? I have a small gambling bankroll, but since I’m wealthy, my gambling bankroll might seem like a large dollar amount to most recreational gamblers. I’m comfortable with a gambling bankroll that represents about 1% of my net worth. Since most of my day is spent managing my business, and gambling isn’t my only hobby, I don’t spend much time gambling (although I do spend a lot of time studying gambling). Most of the time, my gambling bankroll is sitting in a few accounts collecting interest. I use these accounts as collateral to trade derivatives (a form of gambling) and to hold investments in casino companies. I figure that between gambling trips, I might as well grow my gambling bankroll by investing it wisely. Sometimes when my gambling winnings become so large that my gambling bankroll is an out sized portion of my net worth; I spend some of my gambling bankroll on food and lodging during my vacations in order to draw down big wins.
By viewing your gambling bankroll as part of your asset allocation, it helps frame the decision surrounding how much of your net worth should be devoted to gambling. Unless your goal is to become a full time gambler, a wise investor should keep their gambling bankroll as a small portion of their net worth. Most assets should still be devoted to productive investments such as stocks, bonds, and real estate.
In the long-run, advantage gamblers might come out ahead. But in the short run, their gambling generates many frictional costs. These costs include time spent practising, planning, scouting, and executing their gambling strategies. I view my own casino gambling as I view my derivatives trading. Both activities provide a rate of return that is uncorrelated to the rest of my investment portfolio. Gambling and derivatives are zero sum activities that carry transaction costs. These transaction costs make gambling and derivatives trading economically negative in the long run. But advantage gambling and derivatives trading are fun; and they may provide an opportunity to expand the efficient frontier.
