Beating the House

Is investing like gambling?

Global Market Update - Blackjack with Hands (AKblack)Photo:

I’ve written before how investing isn’t gambling. Gambling is a zero-sum game, while investing makes everyone better off. Gambling is entertainment, while investing is a fundamental part of business. Investors own something real—a share of a company, or a loan to a city; gamblers don’t own anything. They just participate in a process.

But in some ways investing is a lot like gambling. In both cases you start with some money and try to make it grow. Both can be addictive. And both are numbers games involving probability and risk.

In a recent interview Bill Gross noted that one of the biggest influences on his early investment career was a book about how to win at blackjack. The text outlines basic strategies like counting cards to improve your chances. But it also explains that it’s essential to manage your stake—how much you bet on each hand. Because if you don’t—if you just let it ride—a run of bad luck can wipe you out, even when the odds are in your favor.

There’s a lesson here for investors. Even when a great company is run by expert managers and is selling at an outstanding price, there are unknown unknowns that could hurt—or even destroy—any business: weather, war, a toxic waste dump under the headquarters building, an accident involving management. No matter how positive the outlook—how strong the odds are in your favor—bad things happen to good investments. Investment management is also risk management.

A broadly diversified portfolio that allocates money among economic sectors, industries, companies, and even countries is the best way to do this. Because we don’t know what we don’t know.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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