You Gamble More than you Think

Hello everyone, my apologies for no-post Monday, but I had a long weekend and so was away from my comp. Fear not, more money projects are in the works, and I’ll continue to keep you guys posted as we go along. Back to my topic at hand. I’m always fascinated by the purposeful aversion people have in relating investing to ..

I suppose the stigma is that typically at casinos the deck is stacked against you, the odds are purposely put out of your favor and so really, the only logical explanation for you going there to win money is simply for fun. Anything beyond that and you are going to be disappointed or worse, in the poor house. People often take the compulsive warm fuzzy feeling you get when winning at a casino to dangerous levels, hence why casino advertisements are always followed by “Call here if you have a problem with ..” Sort of like the drink responsibly note. They want you to come and have fun and give them money, but not lose your house and give them bad press.

But I can’t help but use this terminology when it comes to investing. How often do you hear “I think X stock was a good pick, I’m betting that their dividends will increase for years to come, and the payout ratio is reasonably low.” What’s this? Betting in investing? Because you are. The difference of course is you can do any amount of research to tip the scales in your favor. No one picks winners all the time, you just need to be right more often than you are wrong (See: Warren Buffett). Either way though, it’s a gamble, because it’s possible for you to lose money. But the odds are in your favor. After all, historically stocks have returned about 10% annually. Will they in the future? Who knows!

What about other areas of finance? How about your house? Many people see their house as an investment, not something just to live in but also something that will rise in value as your life progresses on there. Again, you are placing your money into this vehicle, your house, with the assumption and hope (bet) that it will increase in value. Historically this is true (though not nearly as much as equities), but as you can see with the credit meltdown and falling prices, it isn’t guaranteed.

Entrepreneurs are also daring gamblers, even more-so because the vast majority of startup businesses fail. You invest time and money into your business, oftentimes in the form of a loan. If the business fails? You’ll be forced to sell off the business components at a discount and pay back the rest of the money you borrowed.

What this all comes down to is risk, and your tolerance for it. I deal with people everyday who are shocked and appalled that X fund is down because the whole market had a bad day. If you are going to invest in stocks, accept the fact that you can lose money. If you invest in a new business, accept the fact that it can fail and plan accordingly. Mitigate the consequences of the risk you take by being adequately prepared and diversified.

Otherwise? Well..look at the foreclosure rates over the past few months.

-Xias