If The House Always Wins, Why Not Follow The House Instead of the Gambler?
Market timers. Regardless of how much proof there is to the contrary, there will always be those who are easily enticed with the same type of marketing hype and hopefulness that gamblers buy into. Yes, certainly, it would be nice if somehow we were endowed with the gift of clairvoyance or a crystal ball appeared on our dining room table. We could then, effectively look into the future and get in and out of our investments at precisely the right time. That’s not likely to happen though. So, it’s safe to say the following statements are true:
- No one can predict the future
- Attempts to time the market are futile
- Past performance does not guarantee future results
Yes, advertisements touting past performance attempt to fuel that part of us that makes us “feel like a winner is coming up” when we’re standing at the roulette wheel in Vegas. If these feelings were any more than emotion driven excitement the casinos wouldn’t be in operation. The house is always the winner in the end. Why? Because with gambling the house relies on a proven method.
Why the House Always Wins
A study which appeared in the Journal of Gambling Studies discusses the mentality behind gambling. Casinos are well aware and play into this thinking. The Journal revealed that it is in our nature to delude ourselves once we have made the decision to pursue something, regardless of how irrational this may be. Much the same as some people will pursue a love interest long after the other person has moved on, the pursuit of winnings in a casino is no different.
Here’s how our brain does us in. We focus on the positive and refuse to attach ourselves to the negative. With this in mind, the casino (or the house) knows that if we win a few times here and there, regardless of how small the winnings are, we will be even more excited to continue. This has been proven time and time again in numerous studies which have shown that those who gamble for longer periods of time are more likely to be “ok” with losing larger amounts. Every small win reignites their false sense of hope. The cure for this (one would think) would be to keep an ever running total of wins vs. losses and a dollar amount. The winnings almost never outweigh the losses. Even when the gambler (after several hours) manages to regain losses incurred that evening, the house knows that the nagging “what if I go one more round and win big?” is generally enough to keep them at the table.
Act Like The House and You Can Win As Well
It is a proven fact that you will not win if you operate like the gambler. You’re not going to somehow “win it big” with stock picking strategies. You can’t pick them and certainly the self proclaimed investment gurus can’t pick them either.
As Charles Ellis, author of several classic books on investment strategies, has written, “The evidence on investment managers’ success with market timing is impressive—and overwhelmingly negative.”
There are too many variables working against the gambling investor. It’s like trying to run through a ridiculous obstacle course. First, there’s the investment advisor himself and the fact that the fees wrapped up in his “expertise” and the whole active management game are enough to guarantee that you will not profit. Then, if that’s not enough, there’s the fact that moving in and out of the market is going to give you a 50/50 chance of being in the market on the worst days and out of the market on it’s best.
Gambling with money set aside for Vegas is one thing, but doing so with your future? So, what’s the answer? Stop following the gambler and start operating like the house.
What does the house do? The house sits tight. The house knows that despite fluctuations of winnings and losses, that there will be more losses (of gamblers), so the best way to collect the cash is just to sit tight. As investors, we can learn plenty from this strategy. What if the house was as wavering as the gambler? Let’s say a casino lost 500k on Tuesday night, so closed it’s doors and “got out of the market” until it seemed like a better time. Sounds silly, right? Everyone knows that due to the irrational behavior patterns of people, the house will always win in the end.
Guess what? The same is true for investing. A patient buy-and-hold advocate who refuses to be swayed by volatility in the markets or the talking heads in the media has the best strategy. It may sound dull, but when you look at the casino, the house has a pretty dull plan as well. They don’t generally win HUGE. They don’t have days when one person comes in and loses 7 million dollars in a few hours, but the odds they are operating on are much more reliable. They will continue to win in reliable, predictable increments, just by staying in the game without wavering.
Disciplined investors who cut out fees, refuse to participate in market timing activities, are not swayed by fluctuations in the market but use them to their advantage through regular rebalancing (buying up poorer performers and selling off gains)have learned to operate like the house. They’ve moved from chasing after “one big win” to the slow, less exciting, yet proven method of increase.
The house always wins. It’s a statistical guarantee voided only if you happen to hit a big win, cash out and call it quits right then and there. Play on, and the house will have you again.
Of course, if gambling was approached with any amount of rational reasoning, there would be no reason to post this article, because rationally there is no reason to gamble. It’s the emotional jolt that compels the gambler and it’s the same emotional jolt that compels the investor to chase after gurus and past performance.
David Swensen, chief investment officer of Yale University, writes, “Market timing, defined as a short-term bet against long-term policy targets, requires being right in the short run about factors that are impossible to predict in the short run.”
For more information on the pitfalls of investment gambling and real advice on prudent investment strategies, I invite you to access the free resources found on The Financial Coach Show’s website. A good starting point is The 7 Deadly Traps of Investing along with the audio archives of Bryan Binkolder’s Financial Coach Show weekly radio broadcast. You can also check out the investment firm I recommend due to their Fee Only-Conflict Free Approach Blue Ocean Portfolios.