“Gambling” is a very stigmatised word, perhaps unfairly so. Actually we gamble all the time in various forms; there’s straight-up gambling (blackjack, roulette, sam cheong etc) and there’s the kind where you make certain life decisions in which you hope for the best (should I quit my job and go into business?)
“Investing” and “trading” are on the other hand dazzling words that for reasons unknown make us feel we’re doing the right thing. A full-time investment analyst once took umbrage at my suggestion that the public would be better served if we replaced all usage of the word “trading” with “gambling”. The thing is, a lot of gamblers know they aren’t investing but many traders don’t know they’re gambling.
The other very apt word you see often referring to stock market participants are “punters“. It doesn’t exactly have complimentary connotations but analysts, traders and talking heads have appropriated it to mean the more cerebral “pundit“, exactly what they’re not at that point in time.
As far as card games go, I love a specific poker game called Texas Hold’em. I’ve played close to 130,000 games online over the years. Starting with almost no chips and working my way up to about $1 billion in fake money, I then crashed back down to zero, rebounded and now hovering at about $200 million (if only they were real money).
I’m certainly no pro but the game has given me so much insight about how we invest and what we understand about the economy. Here is a non-exhaustive list of five similarities between Texas Hold’em and investing/the economy (credit to Peter Lynch for planting the idea in my head):
1. You try to profit from available information…
Poker: Read your opponents. Look for tells. Glean probabilities from open cards. Similar to football or horse betting (minus the rigging)
Investing: Study stocks, Look at business and economic cycles. Do the dirty research work. Count the beans.
2. …But information comes at a price
Poker: Players with superior cards will raise to make continued play expensive. Similarly, football teams and horses are priced or discounted according to their superiority or lack. (Leicester City was paying 5000-1 to the chagrin of Arsenal fans)
Investing: Growth stocks are expensive: think tech stocks.
Investing theories like the market’s ‘random walk‘ and the Efficient Markets Hypothesis state that no one can make superior market returns all of the time. Stocks with high potential will be more expensive, making the next probable price move somewhat a random gamble.
3, Mean reversion: things go back to probabilities in the long run
Poker: Bad streaks follow good ones. Sometimes a bad streak can last a long time but not forever.
Investing: Same. The US markets now are now defying gravity, making a lot of punters very nervous. Also, if you invested boringly, you will get returns equivalent to what economies give you – not necessarily a bad thing. On the other hand, if you made big market bets, you can either make or lose a lot
4. Loss avoidance superior to unfettered ambition
Poker: According to some experts, stone-cold bluffing as a strategy is overrated. If you’re playing poker for the long-term, loss avoidance is a superior approach. This means folding (not playing) most of the time and only playing with fairly good hands. Good bankroll management also dictates that you buy into a game with only what you’re comfortable losing and in a way that won’t dent your career winnings.
Loss avoidance (and opportunism) is also why at 185 km/h, the average speed of men’s competitive tennis first serve is 23% faster than the second.
Investing: Asset allocation is the process which determines how much wealth is exposed to safe and risky assets. It’s a way of making the volatility of part of your portfolio as big or small a storm you want it to be.
5. Monetary System: the haves and the have-nots
Poker: Players around the table with a lot of chips have the upper hand over players without. Meagre players can reverse their fortunes by exploiting rich players’ recklessness or by adding money into the table economy. If they have any.
Economy: Inequality and gross economic injustices are the result of policies that allow the rich to one up the poor. Governments can help have-nots by injecting money into the economy. Whether said money reaches them effectively is fodder for politicians, economists and social scientists.
So the next time you hear the word “gamble”, don’t be too quick to knock it. It is a very neutral word like “fire”. In the same way, don’t be overawed by words like “investing” or “trading”.