Are Stocks Like A Casino? No. But YES!

poker_losses
I hate money

I hate money. Apparently the feeling is mutual.

I know this because I am writing this from a hotel room near the Golden Nugget in downtown Las Vegas, following a typical encounter between a poker table and me.

Here’s how this usually goes, and also how it went again today:

I sit down, feeling relaxed and ready to have a fine time with my close personal friend, money. A few minutes or hours later my money – that ungrateful Judas – goes home with someone else.

Gambling is evil

I should stop at this point to state the obvious. Gambling is terrible for you. It’s terrible for society.

When I am finally appointed Lord of all Catan and get to set the rules for everything everywhere, gambling will be outlawed in this country except in tiny pockets of sin like Las Vegas and Atlantic City. Like many, I see a big difference between what’s “fair for me” – I personally like to play poker – and what’s “fair for society” – most people should never gamble.

In the same spirit, I deliver the following Public Service Announcements: Kids, don’t do drugs! Also, definitely avoid intimate contact until marriage!

Anyway, like I said, gambling is terrible. (Also, its super fun!)

All joking aside, I have an important message today – a non-hypocritical Public Service Announcement – inspired by my visit to the Golden Nugget.

Market as Casino?

When I taught a course for adults recently called “Get Rich Slow” one of my students asked whether the stock market ‘just represented one big casino.’

stock_market_not_a_gamble
Appears like gambling, but if done right, it isn’t

A retired widow herself, she commented that young people see investing in stocks as a ‘a rigged game, only benefitting the wealthy.’ Is it true, she asked?

She is dead wrong.

Also, she is righter than she knows. I feel very strongly about this, both ways. I’ll explain.

Dead wrong

Investing in stocks is not gambling at a casino.

Investing in stocks for the long run, in fact, is the exact opposite.

Stocks (in particular diversified stocks) held over the long run (at least 5 years, but 20 years is better) will make you money.

Gambling at a casino, in the long run, guarantees the gambler will lose money. In the long run, the more you gamble, the more likely you are to see your money go home with someone else.

I’ve played blackjack, craps, and roulette. I’ve played poker and sat down in front of slot machines. I’m not proud of any of this.

Roulette Board

The casinos understand the odds, and they set all of these up as unwinnable games, over the long run. Casinos simply don’t offer games that lose money for them in the long run.

We can summarize this idea as “the house always wins.’

I’m not saying I haven’t walked away from a roulette table richer than I started, because I have. On any given day, of course an individual gambler can come out ahead. It happened in the Dominican Republic to me once, involved witchcraft, and it’s a long story I won’t recall here. But that just represents the improbable and occasional victory of witchcraft over math.

Just remember, the more you gamble at a casino, the more the mathematics work against you. There’s just no way around it.

Righter than she knows

The widow from my class is right in a difference sense, however, that investing in stocks is a rigged game. Here’s my strongest statement on the topic, addressed specifically to the young person wondering about the stock market:

In our capitalist system, the stock market is a ‘rigged game,’ in the sense that over the long run, stocks always win.

hot_stock_to_buy
Always ignore garbage like this

Let me clarify what I mean by stock market investing for the long run. By “stock market investing for the long run” I don’t mean that particular form of gambling shilled by the Financial Infotainment Industrial Complex that you can watch on MSNBC, CNBC or Fox News after the closing bell. I don’t mean what’s referred to by the nonsense headlines “Hot stocks to buy now!” or “Best Fund Managers 2015!” being sold by Hot Money Magazine or whatever glossy garbage rots on newsstands this week. I really, really, don’t mean the ‘investing tips’ of day-trading e-news updates filling up your browsers on a moment-by-moment basis.

I specifically mean purchasing a broadly diversified, low-cost (probably indexed) mutual fund, and never selling. I mean a holding period of at least 5 years, but preferably for 20 years or more. I mean purchasing diversified stocks with no end date, no sale date, in mind.

pocket_aces

Stock markets go up, stock markets go down. Businesses grow and businesses die. People buy and people sell. It doesn’t matter if you’re the long-term owner of stocks, because you will make your impressive percentage return on your money in the long run, no matter what.

Please understand: If you are a long-term investor in the stock market, you are not the gambler, you are the house, and the house always wins.

 

Please see my post on my visit to downtown Las Vegas and the “Downtown Project.”

Tourists, and the Antidote – Exploring Las Vegas’ Downtown Experience

The downtown monoculture problem – Las Vegas and San Antonio

The limited role of government in curing a downtown monoculture

and an upcoming post, The role of the visionary billionaire in curing a downtown monoculture

Please see other related posts:

Book Review: Simple Wealth, Inevitable Wealth, by Nick Murray

Book Review: All The Math You Need To Get Rich, by Robert L Hershey

Sin Investing

Interview With Mint.com – I Give ALL The Answers

A version of this post on casinos and stocks appeared in the San Antonio Express-News

 

 

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The Importance of Real Rules Monopoly

monopolyA central idea, the idée fixe of Bankers Anonymous, is that as a society we do a poor job of teaching about finance, a consequently poor job as individuals of learning about finance, and therefore we all suffer an inevitable tendency to make bad decisions, both personal and political, about finance.

Sometime this Spring I realized why: We played Monopoly all wrong as kids. 

This explains everything that I’m trying to do with Bankers Anonymous.

Two ‘house rules’ prevailed when I used to play,[1] and both are absolutely terrible.[2] 

1. Free Parking – We collected all taxes – luxury tax, income tax, and taxes accumulated from Chance and Community Chest cards – in the middle of the board.  In addition, we frequently ‘seeded’ Free Parking with an orange $500 bill.  When a player landed on Free Parking he collected all the accumulated taxes, plus the $500, in a lottery windfall.  None of this exists in the real rules on Monopoly.

2. No Property Auctions – When we played, the player who landed on an available property got the exclusive option to purchase it, at the listed price only.  In the real rules, if the initial player declines to pay the listed price, any player may bid on the property, at any price – starting if necessary at $1, with no upper limit to the final auction price.

These house rules turn an interesting game about capitalism into a boring monstrosity.  A monstrosity responsible for societal poverty, government debt, runaway inflation and the Crisis of 2008.[3]

Real rules Monopoly is so much better for society

Let me explain why real rules Monopoly is far better.

Free Parking – Free Parking is stupid.  Growing up, my friend Brendan always, always, ALWAYS landed on Free Parking, collecting the taxes and the $500.  How did he do that?  I have no idea. 

Although he may have always won the game, I can be smug in my knowledge that Brendan learned bad lessons from Free Parking.  Free Parking never happens in real life.  Nobody actually wins the lottery. Clearly, Free Parking is a gateway drug for kids to learn about lotteries, casinos, and all the other terrible ways in which poor people pay taxes. 

Property Auctions – This would have been the ideal way to teach millions of children about valuable concepts like savings, real estate, competitive auctions, distressed investing and slum-lording.  Information, in other words, we can all use.

Instead, by eliminating the auction, we learned in Monopoly house rules that there’s just one price for property, take it or leave it, and that chance – rather than skill – determines whether you accumulate valuable properties.  But that’s never how it works in life.

In real life, sometimes you can nab the property nobody else wants on the cheap.[4]  In real life, sometimes you pay twice what the property is really worth and end up mortally wounded financially.

Bidding wars can break out in real rules Monopoly, which lead the ‘winner’ of the auction to actually be the ‘loser’ in the long run.  This is a valuable financial lesson.  It explains much of the real estate boom 2001 to 2007.

Monopoly isn’t a bad game, if played right

I was reminded of all this by a recent feature on Business Insider showing the odds-adjusted advantageous properties to buy. 

According to the feature, to play the odds, in sum:

1. Buy the orange properties,

2. Build 3 houses per property at one time (i.e. 9 houses, for most colors) for the fastest return on investment,

3. Take into account the likely dice rolls of your opponents.  (5, 6, 7, 8, and 9s happen more frequently, build accordingly), and

4. Note that “Jail” acts as a ‘sink,’ attracting more than your typical proportion of landings.  Other properties also have higher probabilities as landing spots, so invest accordingly.

All sound advice.

My advice is to play by the real rules, which turns Monopoly from an endless bore of a game to an interesting lesson in real financial skills.

I’m not saying Monopoly will become as interesting as The Settlers of Catan, Dominion, or my own nerdy group’s favorite, Cosmic Encounter.  But it’s worthwhile, especially with kids.

Epilogue – The bad news: I played real rules Monopoly for the first time in my life this Spring with Brendan, as well as with my 7 year-old.

My 7 year-old, with some coaching, won.  At least Brendan didn’t win.  I hate Monopoly. 



[1] I’ve linked here to a site that explains the origin of the typical house rules for Monopoly.  It turns out the rules were probably designed to keep kids from getting upset with Dad during the game.  As a Dad, that makes sense.  But as an ex-banker, I’m livid since this encapsulates everything that’s wrong with Western Civilization.

[2] In my 100% invented-out-of-whole-cloth fake poll, 93% of American households adopted these same house rules.  I’ve rounded down to be conservative, because that’s just good science.

[3] Not to mention Obamacare, the designated hitter, and Renee Zellweger after Jerry Maguire.

[4] When we played real rules Monopoly recently, Brendan and I cleverly avoided the railroads.  Because: No houses!  Meanwhile my 7 year-old picked them up on the cheap.  Guess who won?

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Powerball – A Horrific Tax On The Poor

In recent posts I argued that current tax policy for the wealthiest people in the United States incentivizes inheritance over effort, encourages getting ahead either from:

  1. Gifts from Daddy or
  2. Living off your wealth,or
  3. Owning a hedge fund,

…all the while punishing people who actually, you know, work for a salary to achieve the American Dream.

In response, many outraged readers commented that the poorest Americans pay no income taxes, and that the real injustice wasn’t Richie Rich starting out life with $10 million tax free, but rather that Welfare Queens and moochers were living high on the hog of their $28,000 in annual transfer payments, off the sweat of the brow of the upper classes.

Ah, but dear outraged reader, do not worry and do not be alarmed – the poor do not slide by tax free.  No, no, no.  If those poor people want good schools and good roads, our leaders have devised extraordinary measures to tax people who pay no income taxes.

Moreover, taxes on the poor have been rising steadily in the past two decades.  What is this hidden tax?

Lotteries!  Casinos!  The great thing about lotteries and casinos is that the government can capture significant revenue[1] from those Welfare Queens and moochers, without having to raise taxes on the wealthy to pay for stuff like, you know, schools and roads.[2]

Indeed last night’s extraordinary Powerball drawing reminds us that governments constantly levy hefty taxes on poor people, especially poor people who are bad at math.[3]

Lotteries, which generate state revenue of approximately 30 cents for every dollar spent by purchasers, implicitly tax participants much more heavily than other revenue sources, between 25% and 56%.

As I wrote before, what I really find offensive about the abolition of the estate tax and the loopholes for the wealthy is the message that government leaders implicitly send about the value of work and government-incentivized methods of accumulating wealth.[4]  Likewise, what I really find offensive about lotteries and casinos is the clear message from government leaders to the poor about the way to get ahead in life, and the way to accumulate wealth.

The implicit message of taxation through lotteries and casinos is the following: Never mind trying to work for a living.  It’s best for you to try to reach the American Dream through pure dumb luck: the roll of the dice, the spin of the wheel, the turn of the card, or the scratching off of the ticket.  Money is best made not by discipline, sacrifice, intelligence, education, or work, but rather by playing a game, secretly knowing that the odds are rigged against you and that you’re going to lose anyway.

That’s our hugely regressive tax policy for the folks who don’t pay income tax.  That’s the message to poor people from our leaders rushing to promote lotteries and casinos.[5]



[2] How, besides common sense, do I know poor people pay these Lottery and Casino taxes in disproportionate numbers?  Great stats and facts accumulated here.  To highlight a few: 1. Instant tickets in Texas were more likely purchased by someone out of work than someone working or retired.  2. 49% of Californians without a college degree play the lottery, versus 30% with a college degree.  3. 54% of lottery players in South Carolina earn less than $40K a year, although they account for 28% of the state population.

[3] Of course, last night’s estimated $580 million Powerball lottery payout was exceptional – in that the expected value of $1 spent on a lottery ticket was actually positive – an unusual case.  The government still seeks to tax the poor with this lottery, but at least it wasn’t, for this brief instance, taxing both the poor and the innumerate.

 

[4] To be specific about that message:  “The best way to get wealthy is to be born in to the right family.  The best way to earn a living is to have your money make money for you.  The best business you can set up is a private equity or hedge fund, as we will give you generous tax breaks on your income if you do that.”

[5] Also of course the fact that I bought two Powerball tickets and did not win has fueled my anti-lottery feelings this morning.  Go ahead, call me a hypocrite.  I can take it.

 

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