Forum Archive Index - March 2004

["Woody deJong" <solarmax@optusnet.com.au>]

Give it up you guys. 
If you wish to gamble 'bon chance!'
As for me I trade.

Woody



-----Original Message-----
From: sharechat-owner@sharechat.co.nz
[mailto:sharechat-owner@sharechat.co.nz] On Behalf Of Capitalist
Sent: Saturday, March 20, 2004 11:10 AM
To: sharechat@sharechat.co.nz
Subject: [sharechat] Re: Gambling--moralists and do-gooders alert

>From my favorite pundit :-x Read it and take the tin-foil hat off y'all.

Joker! Joker! And a Triple!

By Donald Luskin

 William Bennett - the high-profile Republican "morality" advocate - was
outed in the media as a big-time gambler, a high-roller who made and
lost
millions in the casinos. There was the usual tempest in the public
teapot,
with Democrats attacking him for hypocrisy and Republicans defending him
for having a right to his own private and entirely legal vices. Now
Bennett
has foresworn gambling, believing that to continue now would be to set a
bad example for the nation.
Why, exactly, is gambling - although now widely legalized in various
forms
around the country - seen as a "vice," or sometimes even a "sin"? Is it
any
different from investing or trading? Aren't they all just different ways
of
putting money at risk in the hope of making more money - and don't
gamblers, investors and traders all get some entertainment for
themselves
out of it, too?

Moral issues aside, I think these are important practical questions for
investors and traders. There are plenty of people out there who probably
now feel that a lot of the "investments" and "trades" they made in 1999
and
2000 were sheer gambling (and, in the end, not all that entertaining).
How
can serious investors and traders understand the difference - and
protect
themselves from indulging in mere gambling?

The central idea that separates gambling from serious investing or
trading
can be discovered in the old saying, "I'd rather be lucky than smart."
The
essential distinction is that gambling isn't smart, and depends entirely
on
being lucky - while investing depends on being smart (but being lucky
never
hurts).

More formally: Investing is putting your money at risk in the rational
expectation that you will earn a return.
It doesn't matter whether the money is at risk for a Warren Buffett-like
eternity or for just five minutes in a quick day trade. What counts is
that
you weren't just trusting to luck - you had a reason to think you were
right, and to expect a payoff from being right.

A digression: Should short-term trading be called "speculation" instead
of
"investing"? No - "speculation" is a just a put-down that has no real
meaning. The length of time doesn't turn investing into something more
like
gambling, so long as you're acting rationally. If the only difference
between long-term and short-term investing is the length of the holding
period, then let's just call short-term investing "short-term
investing,"
because that's what it is.

And just as holding period doesn't matter, whether you win or lose
doesn't
matter, either. A rational investment isn't gambling just because you
lost
money on it. And a stupid gamble isn't a smart investment just because
you
ended up winning.
What does matter is that you put your money at risk rationally - that
you
have a reason to believe that you'll earn a positive return. And it
doesn't
have to be old-fashioned Graham and Dodd-style rationality. You could
invest in an index fund having done no research at all, or for that
matter
you could pick stocks by throwing darts at The Wall Street Journal -
neither of those would be gambling if you did them because you had a
rational belief behind them - that all stocks, at least on average, will
go
up over time.

Gambling is putting your money at risk in the hopes of earning a return,
but with no rational basis.
State lotteries are a perfect example of pure gambling. You know that
the
odds are stacked against you, because only about half of the money
contributed is paid out to the winners (the rest is the "house take").
And
there's no possible way you can apply any knowledge or skill to make
your
odds any better. But you buy a ticket anyway because you just hope
you'll
win - and perhaps you tell yourself that the worst thing that can happen
is
you'll lose a dollar, while you might win millions.
Poker, on the other hand, isn't gambling. If you're a skilled player,
poker
is investing because you put money at risk with the rational expectation
of
 earning a return. Even if you're an unskilled player, the possibility
of
becoming skilled through study or experience is always an option for
you.
If you choose to remain unskilled and play anyway, then you treat poker
as
gambling - but that doesn't make the game itself into a gambling game.

Investing and trading are like poker. Even pure guts-driven day trading
can
be a form of investing. Buying a hot mo-mo stock just because you feel
it's
going to go up in the next five minutes can be considered investing if
you
have a good reason to think that your feelings are valid, such as a
track
record of success for following your feelings. If you find that
following
your feelings consistently loses you money, then persisting in it isn't
investing; that would indeed be gambling for you, even though day
trading
itself could be a form of investment for someone more skilled at it.

There's one factor that can transform investment to gambling: costs.
Suppose a poker game were sponsored by a casino that collected a large
fee
from every player for every hand that was played. If this fee were large
enough in relation to the amount of money being wagered, then even
though
any player might still hope to win by luck, even the most skilled player
would not rationally expect to win. The costs will eventually kill you.

The impact of costs on investing and trading aren't trivial, as
advocates
of index funds have pointed out so effectively over the years. Today's
online trading commissions are indeed low, but every time you trade you
rack up another commission cost. If the cumulative commission costs are
greater than what you can rationally expect to earn from your investment
or
trading skill, then you're gambling - you're just hoping to get lucky
beyond your skills and overcome the costs. That means that part of the
skill of a good investor or trader is to control costs, to execute only
the
trades that really need to be made and avoid the ones that don't really
matter.

So here's my advice to Bill Bennett: Take up investing. Online brokers
can't afford to pick you up in a jet and buy you front-row seats for
Celine
Dion. But it's a great game, and a rational one. If you get good at it
you
could win. And for the moralist in you, you could have the satisfaction
of
knowing that your invested capital is helping America to grow.
Shall we deal you in?
Donald Luskin



------------------------------------------------------------------------
----
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/chat/forum/




----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/chat/forum/