Learn How To Profit More Consistently By Using An Investment Strategy With A House Advantage
- Mathematical expectancy is the key to consistently profitable investing.
- Shocking truth! Most of what passes for investment advice is really gambling.
- How to stop gambling so you can invest for greater, more consistent profits.
Do you know if you're gambling or investing?
Both are games of chance. Both involve probabilities where you put money at risk with the hope of a return, and both can make your hard earned savings vanish if you bet wrong.
So what's the difference between gambling and investing, and why should you care?
The difference boils down to one simple concept that sounds intimidating, but is actually easy to understand: mathematical expectation.
The reason you should care about mathematical expectation is because it tells you how much profit (or loss) you can expect if you follow a gambling or investment strategy long enough to establish statistical significance.
“God does not care about our mathematical difficulties. He integrates empirically.”– Albert Einstein
So what?, you might say. Have a look at the proof.
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Here's How You Could Have Profited From This Investment Advice…
- Did you know the mathematical expectation for a diversified stock portfolio at the end of the 1990's was actually negative for 10 year holding periods, depending on assumptions? This isn't hindsight. These facts were known at the time, and you could have used this knowledge to manage your risk and reduce the losses that many investors experienced during the following years.
- Did you know the mathematical expectancy for 20 year holding periods of stocks at the end of the 1990's was so low that bonds were highly likely to provide a better risk adjusted return than stocks … for 20 years? I'll bet nobody told you that one! Yet, look at what happened to bonds in the following years.
- Did you know the mathematical expectation for your diversified portfolio of stocks, ETF's, or mutual funds varies with the valuation of the market at the time you acquire the portfolio?
- In other words, if you bought equities when P/E's were higher than average, and book value ratios were lower than average, you could expect lower than average returns. Conversely, you can expect higher than average returns if you begin your investment program when stocks offer a better value than normal.
What's Investment Advice Like This Worth To You Over Your Lifetime?
If you answered “millions,” you're probably being conservative. Understanding mathematical expectation is literally the difference between wealth and poverty because it's the ultimate determinant of your profits over the long term.
Mathematical expectation governs your ability to compound wealth.
You can't choose out of this rule because it's inviolable.
“A technique succeeds in mathematical physics, not by a clever trick, or a happy accident, but because it expresses some aspect of physical truth.”– O.G. Sutton
The markets and your portfolio will compound and grow according to mathematical expectation whether you know it or not. This isn't my opinion – it's mathematical fact.
You have only one choice, and that is to choose whether you make the principles of expectancy work for you or against you.
How Does Expectancy Work With Investment Strategy?
It's common knowledge that the odds of an individual coin flip are 50/50, or even odds. If you bet one dollar on heads and received one dollar as a reward every time the coin came up heads, you'd break even or very close to even after flipping the coin enough times.
The mathematical expectation under such a betting scheme is break even.
In other words, mathematical expectation is a function of two variables:
- The probability that your bet will be a winner or loser
- The payoff of a winning bet contrasted with the amount lost for losing bets
“In mathematics you don't understand things. You just get used to them.”– Johann von Neumann
Stated more simply, expectancy equals probability multiplied by payoff.
For example, if you varied the payoff to $2 for every winning flip, and $1 lost for each losing flip, you'd suddenly have a positive expectation game assuming your odds remained unchanged.
This is an important concept.
Ask yourself if you know with any confidence what the expectancy is for the investments in your portfolio.
Do you know the probabilities and their payoffs? My guess is that fewer than 1 in 100 investors have the foggiest clue about the expectancy of their investment strategy.
Amazing when you consider it's the mathematical rule that determines their profits over time.
Investors should only risk money on positive mathematical expectancy situations; whereas gamblers risk money on negative mathematical expectations and unknown probabilities. That's the crucial difference between a gambler and an investor.
In fact, an investor really isn't a gambler at all because his profits are assured over time – it's just a question of sample size.
Are you investing, or just gambling? Do you even know?
The objective of investing is to profit, and the only way you'll profit over time is either by sheer luck, or by betting on positive mathematical expectancy situations.
If you don't want your financial future in the hands of “lady luck,” then you have no choice but to learn about expectancy.
How To Know If You're Gambling Or Investing
I invest for one reason … to make money. Period.
For that reason, I refuse to put a single dollar at risk unless I know the odds are hugely in my favor, and I can make the same bet enough times to realize a profit.
Very few investment strategies qualify under that criterion:
- Buying stock because you think it will go up doesn't qualify because it has no known mathematical expectation.
- Buying stock because you think it's a good company or has good prospects for the future has no expectation.
- Buying stock because you think the market will go up, or because you think it has hit a bottom is also gambling because it has no expectation.
- Buying stock because your advisor or some other expert recommended it is gambling because it has no expectation.
“You can not apply mathematics as long as words still becloud reality.”– Hermann Weyl
The sad reality is most people invest based on opinions that have no mathematical expectation … and that is gambling.
All the above reasons for buying stock are nothing more than opinions, and opinions are nothing more than conjectures about an unknowable future.
They might as well be playing blackjack or roulette because they're betting on an unknown or negative mathematical expectation.
What is the expectancy of my opinions?
If I make 10 or even 100 investments based on opinions, what results can I reasonably expect? I haven't the foggiest clue! No idea. No expectation. I'd simply be guessing, and I'm not willing to guess when it comes to my financial future.
Pay close attention and you'll be shocked that most of what passes for investment advice from experts in the media, publications, and even your own financial advisor, is little more than meaningless opinion … mere conjecture.
They're gamblers and not investors.
If You Want Consistently Profitable Investment Results, Then Take This Advice …
To get even more clear about the crucial difference and to understand whether or not you're gambling or investing, let's examine the difference between the casino owner and the casino customer.
The customer gambles, but the casino owner runs a business. The owner knows he will profit consistently based on the law of averages because every game played puts the odds on his side.
The customers have good days and bad days, but lose over the long term because they're betting on negative expectancy games.
“The gambling known as business looks with austere disfavor upon the business known as gambling.”– Ambrose Bierce
Similarly, your investment strategy either positions you as the owner or the customer. You either run your portfolio like a business with a house advantage, or you gamble. There's no other alternative.
Another clue that you're a gambler is if you get a thrill from your investment activities. Investing is sexy and exciting to a gambler just like the casino customer who enjoys the thrill of the game and the roll of the dice.
True investing is about as dull as watching paint dry because it's just business. It's an administrative task requiring disciplined implementation of a pre-set strategy that's devoid of emotional excitement.
The casino owner comes to work every day, checks his numbers, solves problems, and does his job. He's merely implementing his plan with discipline, thus profiting with certainty.
Which better describes your investment activities – the casino customer, or the casino owner? Are you investing with a known house advantage in a business-like manner, or are you rolling the dice in hopes of the big score?
Investment Strategy “Nevada Style”
The analogy between gambling and investing falls apart in one crucially important place. This critical distinction is the basis by which you can develop a consistently profitable investment strategy.
In gambling, the rules of each game are pre-defined to give the house an advantage – a positive mathematical expectancy.
Conversely, that means every gambler has a negative expectancy.
With investing, there's no pre-defined “house advantage” because there's no “house”.
The odds of the investment game are determined by how smart you play the game. You can become your own “house”. You make the rules.
In other words, unlike gambling where the casinos are in control of the odds because they make the rules, in the world of investing, you're in control. You determine the odds by the risks you choose to accept.
Investing is like gambling in a casino that lets you decide whether or not to bet after you have seen the cards. This advantage is hugely important to understand! It cannot be understated.
As an investor, you determine the odds by carefully selecting which hands you choose to play and which hands to avoid.
In other words, investors determine the probability, risk, and reward. They only risk their capital when the expectancy is highly favorable.
You control the risk and reward of your portfolio by creating investment rules that give you the equivalent of a house advantage.
You can be a consistent winner if you develop the knowledge and skills necessary to only invest in high expectancy situations.
Consistently profitable investing is literally that simple.
Investment Advice: Never Bet Without A House Advantage
What's almost unbelievable to me is that most investors absolutely blow this advantage.
They hold the key that can unlock the door to reliable and secure investment profits, but they walk right past that door and choose the casino instead.
Anyone can develop the knowledge necessary to stack the odds in their favor and invest with a house advantage, but almost nobody does. Most investors are really gamblers.
“Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.”– Will Rogers
Most people choose to entertain themselves with stock picking and hot stock stories rather than focus on making money. They don't know the odds and don't want to be bothered with things like math. They prefer to risk money guessing at the next Google or Microsoft rather than investing with skill and discipline.
The choice is yours. You can learn how to take charge of mathematical expectancy and invest with a house advantage, or you can gamble and leave your financial security to chance.
Which will you choose?
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If you invest, then it’s a near certainty you’ll encounter investment fraud. Nobody is immune.