Ben Graham was born in England and moved with his family to the US when he was 1 year old. His father took the family to New York to set up a new branch of a successful family business. This was far from the prototypical immigrant experience. His family was wealthy and moved to 5th Avenue in a house staffed by domestic servants. This lifestyle would not last.
Graham’s father died in 1903 when Graham was just 10 years old. The family business soon went under and his mother sold off their possessions to keep the family afloat. In a last gasp to try and salvage a future for her family his mother took their little remaining money and bought US Steel shares on margin. She was wiped out in the 1907 banking crisis.
This was the origin of Graham’s hatred of speculation and in his most popular book The Intelligent Investor he drew a pronounced distinction between investors and speculators. Chances are he would not like what is going on today.
The not so fine line between securities markets and prediction markets
A derivative is a financial contract that derives its’ value from the price of an underlying asset. For instance, a USD currency future’s value is based on changes in the value of the USD.
Derivatives can be used to hedge an exposure or for speculation. Either way there is a consensus that derivatives on underlying assets like currency and commodities are financial instruments.
Then there is the prediction market. Like a derivatives market a prediction market facilitates two parties entering into a contract whose value will be determined by the outcome of an event.
Some of these outcomes could conceivably be used to hedge a market outcome like the recent contracts on the Iran war or those on consequential elections. Then there was the $145 million in trading volume based on Bad Bunny’s Super Bowl halftime show.
Many of the prediction contracts are on the outcomes of sporting events. The technical difference between sports betting and a prediction market is a bookie is the counterparty in betting while a prediction market just facilitates the trades. This is a difference without a distinction if you are placing the ‘bets.’
Investment markets and prediction markets merge
Investment and prediction markets are starting to merge in the US. Brokers Robinhood and Interactive Brokers Group now offer share trading and prediction contracts side by side. Robinhood has long focused on the gamification of investing. Now they are throwing off the pretense there is any distinction between investing and gambling.
As for Interactive Brokers, their Chairman Thomas Peterffy told Barrons, “In my mind, prediction markets will be the biggest space for investors in the coming years, I think it will far exceed the popularity of even the stock market.”
The regulators in Australia are taking a different approach and have classified prediction markets as gambling and banned them. In the US they have been declared ‘event derivatives’ and are regulated nationally by the Commodity Futures Trading Commission (“CFTC”).
Whatever you want to call prediction markets it is hard to argue they aren’t popular. In November 2025 prediction markets hit $13 billion in trading volume. That is up from $100 million in April of 2024. Polymarket and Kalshi are the two industry leaders.
The Wall Street Journal followed one ‘prediction market trader’ during the Super Bowl in February. The former university student dropped out to trade full time and saw the Super Bowl as an opportunity to take advantage of less experienced traders.
He went through all the motions of having a system in place. One picture showed him with two laptops and multiple monitors which he used to trade what he described as mind numbing volatility.
Reminiscent of a parrot who learned to mimic seemingly complex patterns he constantly traded during the game trying to take advantage of recreational gamblers. After placing $300,000 worth of trades he ended up with net losses of $100,000 during the three-hour Super Bowl.
Exploiting recreational investors
Since Ben Graham drew the distinction between speculation and investing the lines continue to blur. At the risk of seeming anachronistic I think the distinction still matters and your outcomes are dependent on which side you find yourself.
For those that still consider themselves firmly in the investor camp there is some good news. Investing success is reliant on identifying your edge or competitive advantage over other investors. The sources of edge range from analytical ability to simply making fewer mistakes than most investors.
A long-term orientation is an edge that anyone can exploit. And as more people lose sight of the differences between gambling and investing that edge becomes more valuable and easier to gain.
It is easy to look at predication markets from a moralistic high ground. It is satisfying to roll your eyes at the hubris and naivety of ‘prediction market traders.’ But we all can fall into the trap of seeing investing as entertainment and sport.
The reason all of us invest is to try to improve our own lives and the lives of people we care about. As more people treat prediction and share markets as a mechanism to gamble, keep focused on what really matters.
Ben Graham’s words serve as a reminder of where our focus should be. Graham said, “A long-term investor is the only kind of investor there is. Someone who can’t hold on to stocks for more than a few months at a time is doomed to end up not as a victor but as a victim.” Don’t forget that.
Mark LaMonica, CFA, is Director of Personal Finance at Morningstar Australia.