I personally would consider myself a conservative investor. You may be wondering just what I mean by such a thing. I can assure right away it has nothing to do with political affiliation or my opinions on taxes. What it does mean however is that when managing my money I prefer to generate a steady income of a long period of time compared to strategies that would claim to have you “get rich quick” or “beat the market” by some absurdly high percentage. For all intents and purposes, anything over 15% is absurdly high*. Of course, not every sees things correctly like I do (wink wink, nudge nudge) and would tell you to allocate funds in a more aggressive manner. In a majority of those cases, these would be financial advisors are basically insisting you gamble your savings in hopes of hitting it big to pad your retirement account.
As far as I am concerned, gambling is for fools. I want to retire and not have to become a Wal-Mart greeter when I’m 65, and the best way to do that is to be conservative in your investing and plan for the long haul. Now, some people may say things like “If you’re playing the stock market, you’re basically gambling no matter how conservative you think you are!” or “There is always risk, so you’re always gambling to some degree!” or some other such ignorant thing. People say these things because they lack understanding of deeper theoretical principals and cover those with blanket statements hoping to land on both sides of the fence (you can’t be all wrong if you’re sort of right).
Given my distaste for such fence riding, and complete foolishness, I have decided to put together a work (I refer to it at home as my treatise because I like how that sounds) encompassing my theory on investing in the stock market and why the aforementioned conception is wildly mistaken. In this work I plan to draw a clear distinction between ‘taking a risk’ and ‘gambling’. As a student of philosophy, I of course, plan to do this through analogy. What analogy you ask? Why that of:
Tournament Style No Limit Texas Hold’em.
Unless you’re already fully familiar with where this is going, you may be confused as to why I plan to prove a distinction between risk and gambling using poker, which is often referenced as the epitome of gambling. Worry not, dear reader as this will all become abundantly clear throughout the course of this project. First, it’s important that you understand when I reference poker through the rest of this project I am meaning the bold words above. Secondly, to clarify why that is important I wish to point out there is a stark difference between Tournament Style Hold ‘em and your local card game. Tournament Hold’em, which you may have seen on ESPN at some point (Called the WSOP or World Series of Poker) is a grueling multi day, multi-table tournament in which your goal is not to “get rich quick” but rather sustain you holdings, make incremental increases to your chip stack and most of all avoid getting busted (i.e., losing all your chips). The longer you last in these events more cash you generate for yourself in the form of prize money (with those making the prize cuts starting at around 60 grand).
If you’re interested in more information on Tournament style Hold ‘em, a quick google search should get you to the right place. The point I was truly intending to make in the above paragraph is that when you’re playing cards with your buddies, you may very well be gambling; making bad calls in hopes of getting lucky. You’re playing for the excitement and entertainment of the game, not to necessarily win all of your friend’s money. Tournament poker is basically the opposite. Tournament poker is a job. You are there to win and to win big. Of course, while there is some luck involved in both cases, poker is generally considered a skill game. That is how I view the stock market. I see it as a game. A game that can be won. It can also be done on the back of skill with only a small degree of luck needed. Don’t agree? Search up the top poker pros and top conservative fund managers on a ten year timeline. You’ll notice that in each category, the same names will pop up year after year. When you learn the game, it’s no longer a game of chance but a measure of skill.
With that in mind I wish to begin my endeavor to illuminate how I see the game and how I plan to win it based on what I think is a strong theoretical framework designed to give me the best odds to avoid gambling and ensure a low risk way to stack some serious cash for retirement. Like any good theoretical paper, our project is of course going to have some technical terminology. In our case and for the introductory portion of this, those terms are “risk” and “gambling”. It is important that we separate the two terms as they do hold fully different meanings. Although a majority of people often conflate the two terms; especially in things such as poker (which our analogy is based on), we should be careful to not fall into that trap as well. It is our steadfast desire to be excruciatingly clear that will allow us to make better, more rational decisions when it comes to our investments.
So first, let us define “Risk”. Risk in a general sense is our understanding that while the outcomes we desires are not mathematically guaranteed, it is more likely than not we are making the correct choice based upon the evidence presented to us. For example, imagine a case in which you are 99% certain that girl whose number you got last night is Jane, you understand there is a non-zero percentage chance you could be mistaken. Playing those odds is a Risk. While you understand the possibility for error, the mathematical odds are slim. You may ask yourself, how one can be so certain of such things. The answer to that lies in evidence. You may in the aforementioned example, have the name “Jane” written underneath the number on the napkin you possess. Or maybe your friend who introduced you to her called her by that name. There are plenty of tips or clues available to generate a positive level of certainty. On the other hand, you can imagine a case in which there is no name, or maybe you were drunk when you were flirting with this girl. For some reason, the name Jane comes to mind, but you’re unsure of why exactly. In this case your odds of being correct have diminished. Maybe now you’re only about 70% certain her name is correct. The level of risk involved in referring to her as Jane has increased. However, we still maintain a positive level of evidence to suggest correctness (although not as much as we’d like).
So at what point does risk become a gamble then? Is there some magical percentage or solid line in the sand that divides the two? Traditionally, the answer to that is no. However, it is my hope that by the end of this project, we can change that. So how do we define a “gamble” then? For this project I will define a “gamble” as a decision made in which the odds are a ‘coin-flip’ (50/50) or worse. In cases in which you cannot be sure and have no clear evidence from which you can deduce one way or the other whether a choice is correct or not, the choice you make in that instance is a gamble. I hope that once this analogy is finished, this distinction will become clearer. I plan to revisit these definitions over the course of this project in order to hone them down to a level in which we can be confident the line is drawn between the two.
So we’ve very quickly differentiated the two terms for general cases, such as remembering names, or determining where we may have left our car keys, but what of investing? What about our Poker analogy? For this, we probably ought to adjust our definition of “Risk” to one which seems more applicable (or at the very least appropriate from a fiscal perspective), which we’ll call for the time being Risk’. Investopedia defines Risk’ as: “The chance that an investment’s actual return will be different than expected.” We can see quickly, that this provides little assistance in further clarifying our situation since as far as Investopedia is concerned, Risk’ and gambling have no distinction since at some point a choice is merely very risky as opposed to a gamble. —
* I haven’t done enough research on this figure yet, so I’m just pulling a number out of my ass as a place holder. Keep that in mind.
So that’s all I got done thus far. My hope is to have some amount of this done weekly, and hopefully have concluded by the end of summer. At that point I hope to get it all together in one place for you to read. Hope you enjoyed this and I should have something up tomorrow as well since I am finally done with school and have some downtime now. Thanks for reading.