By Justin May, Portfolio Manager

I can risk my money by betting on professional sports, college sports, and youth sports. I can bet on online poker, online slot machines, online “games of skill”. I can trade Bitcoin, foreign currencies, gold, fine art, wine, and whiskey. I can buy stock index funds, “meme stocks”, and stock options. I can buy boring bonds, junk bonds, foreign government bonds, even other people’s car loans.

Or I can risk my money on a “prediction contract” involving almost all the above, or the next president, or the date of the next recession. These prediction contracts formalize bets on nearly any event or outcome imaginable.

Kalshi, a prediction market platform, aggregates your contracts into what they call a portfolio. Their app shows the values of each contract and your overall portfolio as they go up and down in real-time. You can buy and sell prediction contracts instantly, before the underlying event happens. Kalshi reports your account’s performance like a traditional investment broker. Kalshi is regulated by the federal CFTC, the same commission that regulates stock options.

The difference between investing and gambling is becoming less clear. Here’s my opinion on where the line is drawn.

An investment is not a zero-sum game. If I buy a derivative contract (an options or prediction contract), any dollar that I make comes directly from someone else’s wallet, and vice versa. No wealth is created or lost; it only changes hands. Any non-productive asset like futures, currencies, gold, and trading cards works the same way. Your expected return as an ‘investor’ in any closed zero-sum environment is zero, minus transaction fees. In other words, you’re gambling. In the case of precious metals or collectibles, expected return only becomes positive when new ‘investors’ enter the market – which explains why these things are advertised so heavily.

Traditional long-term stock investing, on the other hand, is a positive-sum game – in other words, all investors can profit simultaneously. Companies innovate, improve productivity, compete, and create jobs. If a company generates more economic output and profit, stock investors have a claim to those profits, so the value of their investment rises. The value of an investment is based on actual, real-life economic fundamentals, not purely demand or speculation. In the short run stock prices may swing wildly with speculation, but eventually fundamentals matter.

The difference between investing and gambling has little to do with whether an asset sits in a brokerage account, carries a government stamp of approval, or trades in a massive market. Consider the purpose of the investment. If your expected return comes from the creation of economic value, you’re probably on the right track. If you’re hoping to find a bigger fool, you’ve probably crossed the line.