The popularisation of online gambling has led to widespread legalisation and regulation in the U.S. market in particular. If state authorities and local governments can learn and benefit from monetising and taxing gambling, then surely others can draw inspiration from it too?
Investors, for example, have a unique opportunity to learn from the challenges facing gamblers in order to improve their own strategies. Consider the following lessons they might learn:
See Also: Top 6 Investment Tips for 2015
1. The Fundamental Principles of Card Counting and their Importance
Card counting is the practice used by blackjack players to determine their precise probability of winning a hand; they appreciate the true nature of random events and are able to identify patterns that can be used to cultivate a viable strategy.
If you were asked to predict the outcome of 10 imaginary coin tosses, you might be inclined to restrict the number of consecutive ‘heads or tails’ spins under the mistaken belief that the results are more statistically likely to alternate. This is flawed logic, a phenomenon known as ‘gambler’s fallacy’, as each possible result has an equal probability of being recorded at any given time.
What can Investors Learn? The ability to identify patterns in random events is pivotal to all investment strategies, particularly those associated with derivative products or volatile marketplaces such as the foreign exchange. This also creates a sense of determinism, and enables investors to confidently apply their strategy while also estimating their returns regardless of any random, external circumstances.
2. The Importance of a Fixed Loss Limit
Establishing a loss limit prior to any session – a fixed amount that you can comfortably afford to lose before you walk away - is a fundamental aspect of gambling which experts suggest should be fixed at 50% of your gambling capital.
The same principle can be applied to the frenetic and often unforgiving financial markets, especially those that trade primarily in derivative products such as currency and futures contracts. These deliver margin-based investment opportunities, which are potentially rewarding but also capable of triggering losses far in excess of your original commitment. Without a predetermined loss limit, a couple of poorly judged investments can cause your arrears to spiral out of control.
What can Investors Learn? First, investors must have a clear understanding of their chosen market and products. This includes derivatives and fixed assets, as from here it is easy to manage your funds and create an accurate profit and loss plan. You can then look to apply a loss limit of between 40% and 50% of your capital depending on your portfolio, budget and appetite for risk. To simplify the process of managing losses, you should also look to partner with an online broker that includes a ‘stop-loss’ as a standard feature.
3. Make the Distinction between Strategy and Philosophy
There is a popular misconception that strategy and philosophy are the same thing, but there is one key difference: while your philosophy influences the type of games you play, your strategy is how you play, or your blueprint for success.
Investors must create a portfolio that suits their innate philosophy before cultivating a strategic plan that minimises risk and optimises returns, in the same way that a gambler has to choose the game that pays out the highest percentage of revenue before creating their strategy. Both gamblers and investors are risk-averse and want the highest probability of winning and the minimum risk of loss.
What can Investors Learn? Investors must be aware of their appetite for risk before entering a specific market, and create a portfolio that they are inherently comfortable with. Higher risk investment options include derivative and margin-based products, which are often volatile and capable of initiating substantial losses. In contrast, dividend investment options are more stable and reliable, and despite lower returns they are ideal for risk-averse traders with a cautious outlook. From this point, the process of implementing a viable strategy is far simpler as you can operate from within your comfort zone without compromising on the profitability of your portfolio.
See Also: 5 Ways you are Gambling with your Cash
These points underline the similarities between gambling and investment, and highlight the lessons that serious financial professionals can learn. Are you a gambler or investor (or both?) Can you think of anything we’ve missed? Please feel free to share in the comments section below.