What would happen if the Bellagio had a losing streak? – They lost millions and millions of dollars over several nights – and decided to “protect” what they had left by shutting down their gaming activities. Would that make sense?
Such a choice would result in a significant change in strategy and prevent them from making back the money. This would be ludicrous because the odds (probabilities) are in the house’s favor. The longer they stay in the game, sheer statistics says the more they will profit. So why get out? They don’t, but investors often do. Investors can learn a thing or two from casinos – not from the gamblers, but from the house.
The House vs. The Gambler
The house is the investor and the players are the gamblers – playing games of chance with probabilities stacked against them. Gamblers don’t invest when playing slots, blackjack or roulette. Those are games of chance with probabilities stacked against them. Sure they may win from time to time, but the advantage is with the house. Anything can happen in the short term. But the longer gamblers keep playing, the more likely they are going to lose because the probabilities are stacked against them. The advantage is with the House.
Similar principles occur in the stock market. Over the long term, population growth spurs economic activity which spurs growth and asset inflation. A long-term investor (House) has probabilities in his/her favor. Yet, many investors make investment decisions based on short-term, volatile and unpredictable outcomes. Instead of acting like the house, they oftentimes will change strategies and become a short-term investor (gambler) where the probabilities of guessing correct outcomes are against them.
Bet vs. Invest
In the June video for Mind Games Subscribers, I discuss and illustrate how the financial media uses the words invest and bet interchangeably, and what investors can do to ensure they are investing and not betting.
The sad thing is that it is more common to see the phrase “investors bet” than “investors invest”. But the truth is that investors invest and gamblers bet. Yet, over time we keep reading how investors bet…and this could, on an unconscious level, influence investors to abandon their investment strategy and begin to gamble on short-term, unpredictable outcomes – basically just like a gambler playing games of chance at the casino. We are often surprised at what the market does (interest rates this low, Jan/Feb sell off and subsequent rally etc.) – so while we always have a good explanation in hindsight, market outcomes are unpredictable, just like games of chance.
This is problematic for the well-intentioned investor who is acting like a gambler but doesn’t realize it. Words matter. And hearing the words “investors bet” over and over again sends the wrong signal. Investors don’t bet. It’s time to call a spade a spade. For the long-term investors, the probabilities are on their side. But they have to allow time to work in their favor.