Gambling?
While situations and locations change, human nature makes us act very much the same when we believe we have something to gain. Take gambling, for example. In Las Vegas, where it’s legal to gamble in almost every conceivable way, you know when you go in that the odds are against you.
Say, for example, the odds at a particular casino are that your chances of coming out a winner after playing for a long time are 45%. Of course, that means that your chances of coming out a loser are 55%. You an also look at it another way: Suppose you start with 1000 players, all of whom play the their hands at the same game. Of those, 450 will come out winners. Now repeat the process. By the odds, 45% of 450, or 202 of them will be winners again. On the third hand, about 91 will be winners. On fourth hand, there’ll be 41, on the 5th hand, 18, on the 6th hand 8, on the 7th hand 3 or 4, on the 8th hand, it will be down to 1 or 2. Such a person (one or two in a thousand) will have won eight consecutive hands. What a streak of luck! What are the odds? We just figured it out: 1000 to one. Of course, it’s not about luck at all. Mere chance predicts that all things being equal, someone will have been lucky enough to keep winning. Raise the number to 1,000,000 players, and some one or two will win 16 consecutive hands. Oh, so lucky are they!
Now, look at the stock market. With millions of people trading stocks these days, the same situation applies. A lucky few will be right all the time, and still more will be right most of the time in their purchasing decisions. While in Vegas, these guys would be called “winners”, on Wall Street, they are called “experts”. Just as it’s true an expert poker player can improve his chances, being informed about the market conditions and the companies whose stock your buying can improve the odds, but not necessarily by a lot. It’s true, though, that the odds of making money on Wall Street are considerably better than in Vegas. That’s because historically the market has had an overall upward trend, meaning that on average stocks increase in value.
And then there’s the matter of cheating. In Vegas, cheating is against the law and it’s carefully watched for by the casinos–there are cameras everywhere, whether you see them or not. If you cheat in Vegas, you’re not only likely to be caught, you can be banned from the casinos, or worse. On Wall Street, there are also lots of ways to cheat, but the one you hear about most is “insider trading”– which is also very illegal. Unfortunately,it’s hard to define and quantify, and the smart traders know when and how to use it and get away with it. If you’re the CEO of a company and own stock, you’ll probably sell when you realize the company is tanking. And you’ll probably know the company is going down the tubes before anyone else does. Is that insider trading? I wouldn’t know. Is getting a “hot tip” on a stock insider trading? I don’t know that one, either. But I’d guess that many of the successful “experts” and “winners” on Wall Street didn’t gain their success entirely on the odds.
There is another big difference between the Strip and Wall Street: Stock trading is still legal in all 50 states!
