Gambling and Beating the Spread

Accept Reality or Pretend: Your Choice

"I believe that most people prefer to think that a 'business approach to investing' just makes sense - plain and simple. Though if you bring the discussion further, and really delve into what that means, and specifically, how it's reliant upon prediction, then you get a lot of blank stares. People have told me that they might not know the ins and outs of how their money manager is making decisions, but they know he is using 'sound investment principals' and they feel safe with that. When I bring up price being the real-time determinant of value, when I bring up money management and systematic trading decisions, as a clear way to be actively involved in your chance of turning your nest egg into an eagle, I get a lot of negative responses. The feedback I get is that people want to think that you need to be a hard working detective to really dissect these companies, understand the businesses, know the management, read the economy and then make an investment based on these 'facts'. They really would rather have that, and pay for that, and buy into that - then work on themselves and take responsibility. I certainly don't think everyone is that way, but it seems that the majority is."

The way I look at gambling and trading is this:

In gambling, the house always has an edge. It varies by game, but they always have an edge. If they have a 1% edge, then for every million dollars bet, they will get $10,000 in revenue. If they run $100 million through that game, they will get $1 million in revenue.

In casinos, some people win big, some people lose big. But statistically, the house knows that its edge will bring in the revenue. As a gambler against the house, you cannot get around it. You can, however, play games that have the least house edge and you can use prudent risk and money management to make a living gambling. It is possible and there are guys doing it. But that does not mean the house will still not get its revenue from others, like Aunt Martha and Cousin Bob.

With trading, I am the house. I have the edge (side note: if you don't have an edge, you should not be trading). Your edge could be a particular setup that works 58% of the time. That's an edge. You could have a setup that works only 30% of the time, but your edge is taking frequent small stops and riding very large gains when you are right. That's a legitimate edge. Likewise, in spread betting you have to beat the spread.

The point is, trading is like owning a casino. It is not like being a casino customer.

That's why I get a little ruffled when uninformed people (usually well-meaning friends or relatives) say "Trading is gambling." They are, of course, correct. But in Vegas, the house gambles, too -- against the customers. Do they lose? Of course not. They have an edge. You have to beat the spread.

My advice to traders and gamblers -- part-time and full-time -- is to keep doing it as long as you think you can make money at it, and as long as you can stand the risk along the way. And don't be ashamed of it.

Gotta have an edge and beat the spread. That's the grail.

We been broken down
the lowest turn
and been on the bottom line
sure ain't no fun
but if we should be evicted from our homes
we'll just move somewhere else
and still carry on
Hold on, Hold on, Hold on

[Chorus]
The only way is up, baby
For you and me, baby
The only way is up
For you and me

Now we may not known
Where our next meal is coming from

But with you by my side
I'll face what is come
boy, I wanna thank you
for loving me this way
things may be a little hard now
but we'll find a brighter day
Hold on, Hold on, Hold on

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