The American Dilemma and How We Can Fix It

Posts tagged ‘Gambling’

TAKE A CHANCE

This past week I was surprised at how many friends, neighbors and acquaintances made a pilgrimage.  No, this was not a religious outing in pursuit of a higher Lenten experience nor in preparation for Passover.  It was a quest to buy lottery tickets for last week’s largest-ever jackpot of $640 million which ultimately was divided among three lucky winners.

These folks, in pursuit of a chance at a lifetime of ease and financial security, drove to outlets in Arizona or California so they could stand in line to spend their money purchasing tickets.  They were participating in the “new American Dream” which suggests that the two ways to achieve success are either to “Win the Lottery” or “File a Law Suit.”

Games of chance have been around since man learned how to carve bones into dice cubes.  But all games of chance, whether they use dice, cards, lotteries or slot machines have one underlying principle.  They are designed to re-distribute wealth among the game participants.

It surprises me how so many people who live here in Las Vegas, a city that has been built on gambling, are unaware of the true fundamentals of gambling.  They go to the casino, play slots or video poker and occasionally win – sometimes big and are delighted that they “beat the casino”.  Many more times they return home with less money than they started and complain that “the casino beat them”.  The fact is that neither of these statements is true.

Their winning episodes were the result of their taking home the money of other players who had previously played that particular machine.  And their losing episodes will allow those who play that machine after they have made their donation to walk away with some or all of their money.  The casino is a mere intermediary – collecting a percentage of all the monies that have been fed into that particular machine.  In essence, they are little more than a banking facility – charging a fee for their services to cover overhead and earn a profit.

Gambling, unlike capitalism, neither creates nor destroys wealth.  It merely moves it around.  A friendly home game of poker will demonstrate the concept.  Each of six players invests one hundred dollars in the game and at the end of the evening when the game breaks, six hundred dollars remains on the table.  Some players will have more and some less than their original starting investment.  No wealth has been either created or destroyed – merely re-arranged among the participants.

Most of us would feel that if we went over to a friend’s house and saw one hundred dollars lying on the coffee table it would be wrong to pick it up and put it in our pocket.  In essence that is exactly what happens when we gamble in a casino – and in that venue we seem to feel that “winning” is perfectly acceptable.  However, it is little different than the example of picking up our neighbor’s money – only in this case the “neighbor” is a nameless and anonymous person.

The purpose of this post is not to discuss the virtues or lack of virtues of gambling but to draw a parallel between it and the fundamental principle underlying the present administration’s view of how to “fix” the American economy – through wealth re-distribution.  It is a fundamental talking point that President Obama has made a cornerstone of his platform and seems to be a basis of his economic philosophy.

It is the same concept which Karl Marx espoused in “Das Kapital”.  It is an economic system that a significant portion of the world adopted and subsequently abandoned for one simple reason – it doesn’t work and never will as long as some of us are willing to work harder and longer than others to achieve their economic dreams.

The prudent among us would not develop a financial plan based on the outcome of a game of chance.  It’s unfortunate that those in elected office don’t understand this.  Perhaps they were among the many in line buying lottery tickets last week.

THE SYSTEM

 Other than his family and business and reading Zane Grey novels, dad had one other passion. Horse racing. He loved when he had a free Saturday and the ponies were running either at Aqueduct or Belmont Park and once in awhile I would go along for an afternoon of racing.

I enjoyed it when we went to the track. I adored the beautiful horses – and I loved the “Soup Bar.” For seventy-five cents you could get a large bowl of Chicken Gumbo soup and for a dollar a large bowl of Manhattan Style Clam Chowder. Both soups were accompanied by a warm roll and two generous pats of butter. Dad and I would always have a bowl of soup before the first race.

Dad approached betting on horse races as a business. He had started with a bankroll of two hundred dollars, but he had added to it through his winnings and it was now over five hundred. Twenty percent of his winnings were added to his bankroll and the rest went to pay for the family’s expenses.

When we got to the track we would sit in the “cheap seats” in the grandstand, purchase a program and in the program dad would record our expenses. (The cost of the soup we ate would be added in). Dad had purchased the “Daily Telegraph,” the paper that contained the past performances of the horses who were scheduled to race, the night before and done his computations. (This was his “system”).

Dad was rigorous in applying the system. He had developed it over many years, using pure math to formulate the horses on which he would make his wagers. At this evolution (it’s final one) he would wager on three horses in each of the races he had chosen to bet.

When there wasn’t enough statistical data for him to formulate his selections, we would sit out that race. On a typical Saturday we would only place bets on five or six of the nine races that were run at the track.

His goal was simple. To get a return of between ten to twenty percent of the amount of his bankroll at each track outing. (So with his bankroll now at five hundred dollars – a profit of fifty to one hundred dollars after expenses was the goal). We met this goal every time that I went with him – except for one occasion.

As I said, he approached these outings as a business and in the interest of good money management would never commit more than five percent of his bankroll to any particular race. We had bet three horses in each of five races – and had yet to cash a ticket. We were out almost one hundred twenty-five dollars. Total disaster. I had never seen this happen before. And I could tell dad was upset – not so much at the loss – but at second guessing the system that had brought him this far.

It was time for the running of the ninth and last race. Dad put away his paper and said, “You know – I don’t know if my math is off or what’s going on – but I’m going to leave it to you to pick one horse for this race. We’ll bet ten dollars on whichever one you want.” I wasn’t sure that I wanted this responsibility.

The horses appeared on the track for the post parade. There was a beautiful roan horse that was passing before us. He pranced with a very lively gait. I said, “Let’s bet on Number Four.” (As it happened, this horse was one of the three that dad would have bet had he followed his system).

As I looked up at the tote board in the track’s infield, I realized that the horse, Keep Pitching was so poorly thought of that the odds on a winning ticket would pay 64-1. I couldn’t help feel that I was about to contribute to our loss that day. But dad went up to the $5 Win window and purchased our tickets. Then he went to the $2 Win window and bought another ticket. He handed me this ticket and said it was mine.

The horses were put in their stalls in the starting gate and the short six furlong race began. Although having decent position among the field of horses, Keep Pitching was tied up in a pack of five horses and couldn’t break free. After two furlongs it looked very bleak.

Then Keep Pitching broke from the pack and was in fourth place. There were two furlongs left in the race. He kept gaining ground on the leaders and suddenly was in third, then second. As Keep Pitching and the other horse came spinning out of the turn, they were head to head and they stayed that way all the way to the finish line. Photo Finish the tote board advised – and the announcer, Fred Capossela (one of the all time great race callers) announced, “Hold all tickets.”

Because our seats were a little in front of the finish line, it was impossible for us to know which of the two horses had won the race. But “Cappy” made the announcement after a few minutes of nail-biting, “The stewards have reviewed the tape and the winner is number four, Keep Pitching.”

Keep Pitching went off the board at 70-1 and dad cashed in his ten dollar bet for over seven hundred dollars and my ticket for one hundred forty. Dad had cleared over five hundred fifty dollars for the day – even after all the losers and our soup. It was his best day ever at the track. (And mine too).

I appreciate that those of you have been following along have come to expect some point or moral to these posts. While I have simply tried to relate a simple afternoon at the track, if there is a moral it is this:

Even though you’ve done all the right things sometimes you get an undesired result. That’s life. But you have to hang in there – and “Keep Pitching.”

 

ON GAMBLING AND INVESTING

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

 

Tag Cloud