Dec 022018
 



I’ve been know to stray from the index path. When you are in full control of your investments it’s tough to resist that sweet siren call of the Netflix and Amazon stocks of the world. What normally happens when I pick stocks? This image sums it up nicely:

Credit: Carl Richards - The Behavior Gap

Credit: Carl Richards – The Behavior Gap

Maybe I don’t have the will power to hold on when I’m down 30%. And sometimes unforeseen external circumstances forced me to sell (Moving to USA). But at one point I realized:

I’ve made more money at the casino than I have picking “risky” stocks

Okay I’ve profited maybe $200 between all my visits to the blackjack table. It’s not much but I’ve lost more gambling with stocks. Luckily my solid foundation of index funds have completely insulated me from any big losses. I have healthy ETF gains over the past few years. And these risky picks are less than 5% of my total portfolio value.

If you truly want to gamble with your investments I’d recommend using no more than 10% of your total portfolio value. Or whatever you’re willing to lose.

Comparing Odds

Long term payouts for casino games are often quantified by the “house edge”. The odds are always in favor of the house, and each game has a percentage that dictates how much the house keeps when all the bets are averaged out. For a game with a house edge of 5%, the casino will retain about 5% of all bets, and payout the remaining 95% as winnings.

Practically this means that you’ll get 95% of your bets back over time. Sure you’ll win $500 one week, but the next week you’ll lose $550. Over time you’ll have an average loss of 5% of all your bets combine. Here’s some house payouts for common games(assuming someone plays perfectly):

Game House Payout
Blackjack 99.72%
Roulette (single zero) 97.3%
Three Card Poker 96.63%
Craps (Any craps) 88.89%
Baccarat (Banker) 98.94%
Slot Machines 85%-98%

 

This is why I play blackjack. It has the highest payout of any game and it’s simple.

No matter how good you think you are you’ll approach those payout ratios over time. This is how casinos make money. Now lets compare it to the stock market.

How does this relate to stocks?

According to Warren Buffet The long term “payout” ratio of the stock market is 6-7% per year:

The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent

Thus the equivalent “House Payout” of the stock market would be around 106.5%.

Compare that with the casino payouts above. Sure over the short term you might lose 80% of your money or gain 200%, but over time you’ll get $1.07 for every $1 you put in. This is assuming you are using index funds and not trying to actively beat the market.

Conclusion

Short term, speculative stock picks are like spinning the roulette wheel.

Long term, diversified stock picks are entirely different from any casino game, because over time you can expect to earn 7% of your bet back per year.

Don’t be tempted by short term gains, even if you make a couple good picks you’ll probably get burned eventually. Go for the long bet. As the saying goes:

Get rich slowly

Side Note – You can invest in Casinos

Tired of giving money to casinos and want some back? Check out The Great Canadian Gaming Corporation. The year to date return is about 50%. Although who knows what the future holds:

Me when I open my own casino



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