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Is Investing Like Gambling? A Rudimentary Question That Requires Further Inspect

April 1st, 2008 at 06:41 pm

A couple years ago, I read an incredible book about MIT students who were recruited and trained to master Blackjack and count cards in casinos (primarily Vegas, but also exotic locales globally) and net Millions of dollars at the expense of the casinos. It was a tale of incredible proportions - college co-eds strapping hoards of cash to their torsos and bypassing airline security, backroom roughing up, exotic disguises and deciept.

I was riding home the other night and heard an interview with one of the actual subjects of the book and they mentioned there will finally be a movie forthercoming titled "21". I wanted to highlight the book here and recommend that you take a read before seeing the movie, as you often miss out in just seeing a movie when it was preceded by a great book. Most of the time, you'll find that movie didn't do justice to the book, but you will feel vindicated in having read it first. You'll also sound cool in front of your friends in dispelling myths and misunderstandings in the movie and you can close with, "The book was better"...(we all hate that guy, I know). Attached are links to the original as well as the book tied to the movie "21":

One might ask, "What does a finance and investment blog have to do with gambling?". Well, there are many corrolaries and takeaways here. I am not one to espouse the belief that "investing is like gambling", which is the mantra of people that don't understand finances and like to relay this to their friends and spouses to assuage their egos.

The similarities are worth considering:

Investing is about numbers. statistics. probabilities. and random variability. So is Blackjack. Blackjack is the ONLY game in the world where players can routinely beat the house. While the house edge is generally about 1.5%, this edge can sway to the player to the tune of 2-3% on certain hands, which can be exploited beautifully. This is a statistical certainty IF you count and alter your bets accordingly, play perfectly with the most optimal strategy and play long enough.

Although the odds are in your favor, in the short term, anything can happen. It's the standard deviation that gets you. If you're an investor with a short time horizon, you should not be fully invested in the stock market. For instance, if you have $50,000 set aside for a down payment on a house later in the year, you should NOT have this money in equities. Similarly, even by employing the optimal strategies and counting methods, the standard deviation of the game is such that over short periods, your odds of winning are about 50/50, but the standard deviation is enourmous. In a given round encompassing a full day, you will win only 2/3 times. That means you may fly all the way out to Vegas, play for 8 hours each day on the weekend and go home losing your entire bankroll.

Deviating from your strategy and letting your emotions take over can have devastating results. Each investor reading this has war stories of buying more of a favorite stock after a major drop thinking, "How could this stock possibly go any lower? This is the stock that I picked and I know it's a winner. I'm a winner! How is my stock going lower!?". We also know the downside of holding too much of our own company stock to which we already have so much vested, yet we continue to hold a disproportionate amount of shares in our employer's stock. Well, likewise, with Blackjack, how many times have you hit on 16 one hand and stayed on another because "you felt there was a face card coming". How annoying is it having the moron at the end of the table cursing out each person for ruining the run by not playing the hand right. Does he praise them for playing the hand wrong when it benefits the table by forcing the dealer to bust? People get emotional and do not act rationally or objectively when investing and when gambling. In each case, the best outcome cannot be achieved, because you're deviating from the optimal strategy, be it stock diversification, minimization of commissions, avoidance of buying high and selling low, or in Blackjack, giving the house an additional edge by not adhering to the optimal player's strategy.

So, I'd like to dispel any rumors that I've made the proverbial simplistic statement that, "Investing is like Gambling". After all, when you leave the casino, you don't own shares in the casino still. But, there are lessons to be learned and employed in each that cannot be ignored.

I Cashed in My Kids' Savings Bonds. Am I a Bad Parent?

July 2nd, 2007 at 10:08 pm

I've always known that savings bonds have relatively lackluster yields, actually losing money to inflation at some intervals, and vastly underperforming stocks in all extended intervals. Following births, Christenings and Birthdays, my kids started to amass savings bonds from relatives to the point that these low yielding instruments comprised a substantial amount of their savings (college funds). Initially, I wasn't keen on watching these grow at such a low interest rate, but on the other hand, these were gifts from relatives and I thought it was appropriate to leave them alone. I hadn't even investigated what cashing them in entailed.

Recently, one of the grandmothers was watching a personal finance show on television where they railed against the abysmal rates of return on savings bonds and how to better invest in a conservative manner. She called my wife to tell her she'd like to see us liquidate the bonds and get them into a higher yielding instrument. Of course, I obliged, since ~17 years is a long time to outlast lulls in the market. The difference between say, 2.5-5% and 9-10% is enormous over such long periods of time. Therefore, I marched down to my local Commerce Bank with some of my kids' savings bonds in hand to cash in. My current setup has some standing cash in a Commerce account for each kid which is set up to have automatic monthly withdrawals into a nice low-fee Vanguard S&P500 fund in a tax-advantaged account. As the balances approach the minimum investment, I simply add in new funds.

When I arrived at the Commerce and stated my intentions, I was initially met with a look of disapproval and concern at the teller's desk - she referred me to the special desk area on the side of the bank. I didn't feel that an explanation was necessary, but I was inclined to explain that at some points in time, these things are actually losing money to inflation, and that the U.S. stock market has never lost money over 20 year periods of time, etc. To that, I was met with barrier after barrier. First, I was told that I needed original birth certificates for each child. Since I only lived a few minutes away, I obliged and returned. Upon returning, I was informed that they couldn't perform the activity for any bond less than 6 months old. I was OK with that since I had some older ones that would suffice. To that, I was met with an error that "the system" was giving her that wouldn't allow some of these to be exchanged, even though the dates on the face were clearly a year old or more. An additional stipulation was that the total value of all exchanges could not exceed $1,000 for any particular person performing exchanges.

After much ado, I was able to exchange a fair amount of savings bonds gifted to my children (endorsed by some givers), deposit the funds, and then set up an additional transfer into the Educational Savings Accounts (ESA - More in another post on differences between ESA and 529 and why I landed with the ESA). As I was ready to depart, another associate at a different desk who had been looking on in horror told me she recommended I put these funds in a safe place, like a Commerce CD, handing me a pamphlet. I looked at the rates and said no thanks to their offer of 4.6%. Based on the reactions I endured, it was as if I had sent my 3 year old to work in the coal mine for extra cash or something. The question is, "Was this transaction really that outrageous?"

Based on an LA Times article, research by Schwab Center for Investment Research in San Francisco showed that:

"...while an older investor must factor in the risk that the market could be depressed for many years--it has happened before, after all, such as in the 1970s--a younger investor can be comforted by this fact: A diversified portfolio of U.S. stocks has never lost ground in any 20-year period..."

LA Times Article:

My So-Called Portfolio...The Full Monty

June 19th, 2007 at 08:25 am

Greetings. Following another great week and some introspective questions on another forum from a reader, I thought I'd stop posting recent trades only and just put a full snapshot in time of where my portfolio stands for all to see. You can either pat me on the back for continued gains or cringe in horror if this predicted bubble actually bursts, as I hold a lot of high-Beta stocks right now and my fall will hurt more than the old ladies holding cash. Moving forward, following a new buy, I'll throw up a quick post within a day or so. In the past, I thought the research and analysis was the draw here, but there seems to be some interest in whether I'm truly putting my money where my mouth is. Past posts started to include full disclosure, but each article wasn't fully inclusive of all existing holdings not relevant to the post.

I figured by posting about how I DIDN'T buy those AQNT options that returned 6,000% the day after I recommended the out of the money calls because I made the time to post but didn't get around to buying them, it would be evident that I post the mistakes just as prominently as the successes (I literally could have been claiming some clairvoyant market ability with that call and pretended I bought the options, but I was forthright in my self-deprecation), but there's a particular skeptic out there on another forum, as rightly there should be; for there are some disingenuous people out there in the blogosphere...So here it is in all it's majesty:

And before you read this and raise your eyebrows, this is what I currently hold in that one account. It's not to say I haven't taken a beating (and tax-losses "refund moves" is what I tell my wife!; just kidding dear in case you ever visit my website once) on Lucent, EBAY and others; this is simply what's in there now. Since it's pretty volatile stuff, shouldn't be much of a surprise that it's outperformed the market. Some of these have been held for a year or two as well...

Traditional Taxable Trading Account:

Symbol Gain(%)

BIDU 12.41
CMXHF -2.70
CROX 9.82
DNH 1.18
FMCN 81.01
GOOG 30.63
HXM 4.41
SU 52.58
WBD 6.86

Symbol Gain(%)

+BQCGX -10.00

Mutual Funds:
Symbol Gain(%)
BPTRX -0.45

**Disclaimer - I have excluded some particular hedging strategies relying on options/ETFs due to a proprietary method that an old investment club co-founder and I have been working on for years. In the event I can prove the real-life performance matches our back-tested results, we may take it forward and manage funds (May sound far-fetched but the preliminary research shows the barrier to entry is actually not that enormous). It's totally quant, not stock-picking, but in the interest of full disclosure, there are SOME positions in my account which are not covered in this blog due to the potential for future development, which I'm sure you can all respect.

In the interest of time, I need to retire for the evening. In my next post, I'll publish the holdings of my Self-directed IRA trading account which is focused primarily on high-yielding stuff to protect the dividends from taxes. I will also throw up the rough composition of my 401K. Without revealing too much, I don't intend on publishing aggregate net worth, as existing holdings should suffice in showing what kind of stuff I own and how that jives with the research and recommendations I propose here. I will also revisit some of my existing holdings (which I intend on hanging on to for a while) and elaborate on why I have them, what their story is and how I went about getting them (some of the international stuff isn't as easy to buy as you'd think).

A Great Way to End the Week

June 17th, 2007 at 05:40 pm

Following this morning's inflation numbers, the market continued to march toward new highs. This has been especially profitable for me personally, since most of what I own is high beta. In other words, the volatility of my holdings is greater than that of the general market, so upturns in the general market generally lift my portfolio even higher than would be expected. Conversely, in tough market conditions, these holdings could suffer to a greater degree; hence the diversification with double digit yielding issues, international holdings, and an increasing dedication to Prosper.com.

Regardless, I'm cheering today's moves. I took a half day and everyone but me is napping following a long week, so I figured I'd break away to provide an update on "my so-called portfolio". Of recent buys, CROX continues to budge up slightly after a great couple weeks; up 13% just since then. KNOT is up almost 5% today on no news. This could be the forbearance of the takeover I've been banking on. After posting a couple weeks ago and buying some out of the money options on it, it's moved up nicely above $21. As long as there's some additional movement or a buyout by the July expiry, I'm in the money and will have been redeemed for missing the AQNT takeover I called the day before it happened (and didn't act on!). ACAS and IAF, my high yielders from my IRA account are both up over 1.5% on top of their high yields to boot. Additionally, TSP has been on a complete tear this week, up 12% since Monday alone. PCU continues to be strong as well. Finally, BIDU and FMCN, the Chinese holdings are up over 1.5% each. So, it's a nice way to end the week, especially when Fridays are generally low volume, small moves.

Although I don't own LIFC, I did a post on it a few days ago following their new indication and the stock has since moved another 6-7% following the 5% runup on Wednesday (over 3% today alone). Unfortunately, I'm just about tapped out from a liquid stock market investment standpoint and I'm not a fan of digging into margin except under extreme conditions, so for now, I'm going to sit back and watch this one run. If a dip occurs though, I'm in. I see this one doubling within a year or two based on their potential.

Research and analysis for all these holdings can be found in recent posts either through the archives or through the "Search this blog" box.

Upcoming posts will include some more demure plays including bonds and CD instruments that exceed the general market returns and that you probably haven't seen anywhere else. Stay tuned.

A New Way to Ride the Overseas Real Estate Boom

June 6th, 2007 at 08:17 am

Now is an opportune time to take advantage of a new offering that became available for investors looking to capitalize on the continued boom in real estate investment trusts (REIT) overseas. While a lot of the U.S. REITs have either lost their momentum or have seen their share prices rise so much that their yields have dropped substantially, there are numerous opportunities overseas. Some of these can be purchased in the US as ADRs, but ideally, by letting subject matter experts manage a portfolio of 224 companies spread throughout 19 countries, you can minimize your costs, diversify your risk, and frankly, increase your odds of successfully exceeding the returns of any individual holdings as well as the U.S. indices.

WisdomTree International Real Estate Fund (DRW) has a respectable expense ratio of 0.58%. The weighting is primarily in the countries Australia, Hong Kong and Japan; a third of the ETF is in Europe. The firm claims a backtested return of over 14% over the past 10 years, trouncing the S&P500 return of around 8%. I would certainly recommend this ETF as a 5-10% portion of any portfolio given its international diversification, its sector diversification and its ability to withstand market downturns due to the high yield component of the individual holdings. Granted, the international and emerging markets have been extremely hot and do carry significant volatility, but the U.S. market is somewhat saturated now as well. In addition to some commodities and some conservative components, this instrument would be a healthy addition to any portfolio absent other similar holdings.

Turbocharged Investment Returns from Far, Far Away

June 4th, 2007 at 01:34 pm

Based on this seemingly unstoppable momentum overseas, especially of late, I wanted to revisit the international investment category, which not only yields over 10% in some cases, but has made for some great capital gains and diversification to boot. Over the past several weeks, I've highlighted several personal investments I've made in individual stocks and funds from overseas that have fared quite well. I wanted to highlight two additional Central European/Russian investments that I've been in and out of in the past, as well as an interesting Chinese play:

Templeton Russia and East European Fund (TRF) - This fund has roughly matched the returns of the Russion stock market in general, which has been ridiculous over a several year span. It did drop a big since last summer, but I still like the prospects of capitalism in the region and the growth prospects. The fund is up 200% the past 5 years, non-inclusive of significant dividend payouts. This alone beat the S&P500 by a 4x factor over that time period. However, don't be fooled by the 19% dividend yield showing in Yahoo, but it does pay roughly annually now; here are the last few payouts but no guarantees based on this history:

$ 8.849 Dividend
$ 5.248 Dividend
$ 2.735 Dividend
$ 0.839 Dividend
$ 3.843 Dividend
$ 0.39 Dividend

Disclosure: I am still a holder of the fund, but I've primarily liquidated the position to take profits in 2006.

Central Europe & Russia Fund Inc. (CEE) - This fund has exhibited even stronger performance as evidenced by its 5-year 250% return. Again, sporadic dividend payments listed below, but compare to the TRF and S&P500 performance.

$ 5.516 Dividend
$ 0.33 Dividend
$ 0.17 Dividend
$ 0.22 Dividend
$ 0.23 Dividend

Disclosure: My investment club used to hold this one, but unloaded it a year ago.

Shanda Interactive (SNDA) - This is a Chinese gaming company with some nice renewable revenue from the millions of Chinese subscribers to their online games. As the population continues to approach the standard of living of other industrialized nations, this holding has potential to continue to explode in terms of customer base and profits due to the low variable costs for such an enterprise. Year to date, the stock's up a respectable 30%.

Disclosure: I don't currently own the stock due to my heavy international presence now, but I'd consider rotating funds in or buying on a dip from my case position.

International Frenzy!

June 3rd, 2007 at 03:18 pm

I don't know what to say when I see individual holdings jumping double digits in a single day on no news other than "WOW"! Just this week, I've purchased some international ETFs and ADRs that are already up double digits since purchase. Today for instance, WBD rose over 11% on no news. They do have earnings coming out next week and I'm debating if I should just unload the shares and be happy with a quick double digit bump and a few hundred bucks to boot. Not exactly Buffetesque long term investing, but if your daily returns exceed a typical annual return, is holding now anything short of greed?

Of some other recent purchases and recommendations, AMOV was up 3.6% today, PCU was up 5.3% (plus a 10% yield at time of purchase), TSP was up another 2% and HMX was up 1.7%. These are in various markets on different continents.

My strategy on international investments hasn't changed. Now is the time to load up on some international holdings, perhaps even in a leveraged fashion, but only invest with your speculative portion of your portfolio and diversify if exceeding about 20% of your normal holdings. Plan on gradually unloading as the year wraps up and perhaps exit out of most of your volatile plays by next spring. Not that I have a crystal ball, but come on, this isn't going to last forever. It will be agonizing to see 50-100% gains wiped out in 3 days when the precipitous decline finally occurs. It's just a matter of selling when the noise becomes deafening; right now it's getting loud in here. With a new election looming, the international markets won't need much to be spooked; continued Nigerian oil rig interruptions, China sabre-rattling, North Korea madness again. In lieu of these recommendations, I've researched several international options over the past few months in prior posts - see the top posts section.

Since WBD has been so hot, I've continued to research the Eastern European market; found a few that I'll research and report back.

My "So-Called" Portfolio...

June 1st, 2007 at 06:56 am

So, I went on a bit of a spree the other day after unloading my Ebay shares I've been holding for a while in my traditional taxable trading account. The stock hasn't really moved and I don't foresee any near-term catalysts, so I've moved into some foreign holdings. I normally don't do a ton of trading and don't like throwing commissions to the online brokerages more than I need to, but I also want to be fully invested in this market based on some short term catalysts. Here are some recent purchases and drivers:

BIDU - I bought the other day and it's up 6% already; shear luck of course that I bought when I did. But really, I've been meaning to buy it for some time now and haven't gotten around to it. I've been to the site and although I can't read the characters, it's definitely a similar setup to Google, which I've been in and out of since I initially bought in at 290 years ago. As a top search engine in the hottest market around, this is simply buying into the expanding bubble I alluded to in an earlier post this week. The stock is up 70% over the past year. I will likely unload at +25%, then watch in disbelief as it runs another 50%, then when the bubble explodes, feel better again.

HXM - Although the U.S. homebuilders are struggling (slight rebound of late), the Mexican market's doing quite well, including the homebuilders. I was just in Mexico a few weeks ago and the construction boom is on. Everywhere you look; it reminds me of the U.S. building frenzy 5 years ago. The quality of life in the region has been steadily improving, the political situation is stable, and excluding the booing of Miss USA the other night, relations with the U.S., and hence trade is strong. Anyway, it's a big one in Mexico, good past performance and is about even from where I bought it recently. Although I don't own it now, I used to own American Movil (AMOV), a wireless company from Mexico as well. The stock has also performed well, I think I've just about filled my quote of international holdings on top of (FMCN), (IAF) and other funds and ETFs.

PGJ - Powershares Dragon - Chinese Index, discussed previously. Up 16%.

WBD - Wimm-Bill-Dann Foods - A dairy and juice producer from Russia. I know, not the sexiest sounding high flyer, but check out this chart: