casino | Online Savings Blog

Real Savers Don't Gamble
05.12.08 | Money Management | 1 Comment | by Fred Siegmund

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
Real savers do not gamble.

Now I'm not talking about a bet in your football pool at the office or a game of cards with friends on Saturday night — that's fun and entertainment. I'm talking about repeated bets in commercial casinos or state lotteries. Gamblers gamble by placing bets day after day, or month after month.

There is a reason why. Suppose you bet a dollar on the flip of a coin. For a head you win a dollar, for a tail you lose your dollar. You probably recognize that bet as fair; your chance of winning a dollar just equals your chance of losing a dollar.

But suppose you play the game day after day after day. Each day your chance is the same, but after 100 days you might win 56 out of a 100 to be $6 up. After another 100 days, you might win 47 and be up only $3.00.

Keep playing and the laws of large numbers take over. Play the game 10,000 times and you can only expect to win $5,000 but lose $5,000. Play the game long enough and in the parlance of chance, your expected return will be zero: nothing.

Real savers will not be happy earning nothing.

What is true for a private game of coin flipping is also true for all fair bets. Parties to a fair bet will earn nothing unless one of them stops soon after they have a stretch of good luck.

Now we all know the state lotteries and commercial gambling casinos are earning money. State lotteries and casinos earn money because they are allowed to tilt the odds in their favor and the laws of large numbers take over to earn them a return.

The state legislatures have gambling commissions to make sure the casinos and lottery boards do not get carried away and stack the game too much.

Maybe you've heard the phrase "Real women do not pump gas," or "Real men do not eat quiche." Well, "Real savers do not gamble."

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
If This Isn't Gambling, I Don't Know What Is
04.07.08 | Online Investing | 1 Comment | by junger

Trent at the Simple Dollar posited to his readers last week that investing in individual stocks is basically gambling.

Individual stock investing is something like playing blackjack at a casino where, on every hand, the dealer is wagering just a little tiny bit more than you, but there are thousands of people around you shouting out suggestions.

He argues that you might have a slight advantage (his italics), but being profitable is "far from a guarantee and the work needed to get those earnings is tremendous."

Obviously, the fools at The Motley Fool feel otherwise. In their story on how to get 50% annual returns, here's what they suggest:

Lesson 1: Sell your index fund
There is no surer way to not beat the index than by investing in the index itself. Not exactly a revelation, right? Investing in index funds leads to nearly certain long-run underperformance, because of transaction costs and management fees.

Putting aside the preposterous proposition of actually getting 50% returns (which they admit), are they actually arguing that transaction costs and management fees are the downfall of index funds?

That doesn't make any sense. Index funds are great because, in addition to owning an entire index, they're passively managed and have some of the lowest fees in the market.

I actually met Tim Hanson, one of the authors of the article, when I interviewed at the Motley Fool (full disclosure: they didn't offer me the job because they were "going to give priority to candidates with more experience in investing." — aka stock picking).

I told him index funds were my investments of choice, and while he agreed they are the right way to go for 80% of investors, the Fool recommends an "index-plus" approach … meaning, invest in an index fund and buy the stocks they are hocking in their newsletters (because that's what they're really selling you).

Not only are they suggesting ways to get almost impossible 50% returns, but they're spreading disinformation in the process.

Please remember to think about who benefits from the "advice" you get.

free website hit counter