By
The reason that it struck me was that, even though
investing often uses gambling language, this was the first time that I had
seen a financial services company blur the distinction. Usually investments
are presented on a higher plane than gambling. The state government blurs
the distinction all the time to drag investing down to the level of the lottery.
One commercial here goes along the lines of, 'Saving for a rainy day takes
too long; you could win $50,000 instantly if you play the lottery.'
It is to the government's advantage to do this.
Many people agree with them that there is no difference between investing
and gambling. If you read the papers, especially concerning the privatization
of Social Security, you will find many examples of where the editorial writers
who compare the change to the spin of a roulette wheel. This happens because
most editorialists, along with many in the general public, are guilty of
innumeracy. Webster's defines the innumerate as someone who is ignorant of
mathematics and the scientific approach. Innumerate people will prefer a
10% raise in a period of 15% inflation over a 5% raise in a period of 3%
inflation. Unfortunately, being innumerate does not prevent a person from
having opinions or writing them in a paper. Fortunately, most financial reporters
know about concepts such as compound interest or they find that their audience
quickly educates them. Fools remember when the tulip hysteria was placed
in Denmark.
But how does going the other way, equating investing
with gambling, make business sense? Widespread innumeracy, strangely enough,
is what the financial services people must have been betting on. If people
look favorably on the lottery, then they will look favorably on investing.
Their marketing gooroos must have come up with the idea that to bring in
a new wave of investors, they must go after the betting crowd.
So why are investing and gambling linked? Because
there is an element of uncertainty in both. There are no guarantees that
the Dogs of the Dow will continue to perform as they have. A lot of people
hate that because they have a low tolerance for ambiguity. They want investing
to be a black or white choice. They want safe, predictable, linear returns.
An entire industry has sprung up to cater to this need for predictability.
It is called banking and its profits are in the billions.
Fear of uncertainty and innumeracy are synergistic.
Most people cannot do the odds. What is a better deal over a year? A 100%
safe return with 5% interest or a 90% safe return with a 20% return. For
the first deal, your return will be 5%. For the second, your return will
be 8%. Say you invest $1000 10 times. Your interest for the 9 successful
deals will be 9000 x .2 or 1800. Subtract the 1000 you lost on the 10th deal
and you get a $800 return on your original $10,000 for 8%. If the safety
dropped to 80%, you would have lost $400 or -4%.
If you try to discuss this in polite society, a
lot of people will tune you out. They cannot deal with the uncertainty and
so keep their money in the bank (another synonym for a sure thing). On hearing
the 10% chance of losing, they translate it to 100%. Then they use the total
loss as a reason to ignore what you are saying. As Fools, we are willing
to accept ambiguity, even welcome it. Most importantly, a Fool must be willing
to crunch the numbers to reduce the uncertainty. We may not always be right
but we can increase our odds of placing a correct bet by doing the math.
Remember that, buried beneath all the talk of betting,
risk and odds, are two simple numbers that the state does not want you to
think about. The lottery returns 50 cents on the dollar while the stock market
returns 110 cents. Any Fool can see which is the best.