Over the past several years a common misconception has found its way into the way we view investing. With the crash in the market, due in large measure to the banking crisis, we have confused investing with gambling.
The oft-repeated advice to “Buy and Hold” which we have heard from people with the government credentials who are allowed to call themselves “financial advisers” has been replaced with a new phrase – “Buy and Hope.” Saving for the future is now regarded by many as little different than picking a number on a roulette wheel and hoping that you get lucky.
So let’s set the record straight.
Gambling, now referred to by the casino industry as gaming – (it sounds far more polite and less lascivious with those two missing letters) is a game which can’t be won in the long run by the player – even assuming that “the house” is honest. And there is no reason for the house not to be. When you know that you have a game you can’t lose – only the most greedy would jeopardize their income by trying to accelerate their ultimate gains through shenanigans.
Gambling is an activity that has one inevitable outcome. It is the re-distribution of wealth, (much the same as what we hear coming out of the Obama White House). It is something that the participant is destined to lose – and the longer she plays the more she will lose.
Let’s take a look at a no-limit game of Texas Hold ’em – (which will probably be legalized for internet play as soon as the Feds figure out how they can get their hooks on some of the money). A typical table consists of 10 players. Each player brings $1,000 to the game for a total of $10,000 as the game begins. Play will continue for an agreed upon two hours.
The cards are shuffled and cut and each player receives his two hole cards. Someone wins the first hand. This winning player will now have more than his original stake – the other players who participated in the hand will have less.
Hand after hand is dealt and played. Some players lose their entire investment – to the benefit of those players who knocked them out. And at the end of two hours the game is called and the stacks are counted up.
“The house” has taken a few dollars out of each hand (the rake), but there is still $10,000 at the table – some in the drop box and the rest on the table. We have just spent two hours re-distributing the wealth that the original ten players brought with them. That’s how gambling works. It neither creates nor destroys wealth. It merely moves it around.
(By the way, if the game continued rather than ended after two hours, the entire $10,000 will have been re-distributed. It will now all be in the drop box at the dealer’s hand – and that is why the house always wins).
By contrast, investing is far more dynamic. It not only can create wealth – but as we have seen in the events of the last few years – it can destroy it. Does that mean we should anathematize it? That’s a decision that each of us has to make for herself or himself. Let me offer a simple example of how stocks (or other investments) can create wealth.
A company has invented the latest in the “widget” world. The company issues ten million shares of stock at a price of $10 per share, thus raising $100 million. Good for the founders of the company who own a large percentage of this stock and are getting their reward for putting their effort, ideas, time and their original investment at risk. That’s called capitalism.
At this point, this Initial Public Offering (IPO) has merely transferred wealth. The money that was initially invested came out of other investments – whether that was other stocks that were sold to fund the purchase, savings accounts or the individual investors’ check books.
At the end of the first day of trading, “First Global Widget” has increased from its original price to close at $12. The investing world has just created $20 million in brand new, never before seen wealth. (The two dollar increase times the initial ten million share offering). And that’s the difference between gambling and investing.
America attained her position of world leadership because we encouraged innovative, daring people – people who were not afraid to take risk. That is a lesson that the Washington aristocracy has either forgotten or never understood.
Instead of finding ways to encourage the behavior which made America great, they are busy trying to regulate it out of existence, thus cutting off the single largest source for job creation.
While they are in the process, they will find a way to legalize on-line poker and other games of chance and get a piece of that very small pie. As I said earlier, there is one immutable truth about gambling whether the dealer is the casino or Uncle Sam – and that is that “the house” always wins.
“I’m less concerned about what the government can do for me than what it can do to me.”
– Will Rogers