Friday, February 1, 2019, Los Angeles, California


From My Work-in-Progress Basket

What You Can Learn About Investing From a Las Vegas Casino

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The last time I was in Las Vegas for more than a business meeting was when my children, now grown and with children of their own, were in high school. We spent a week there, marveling at the mega-hotels, getting lost in the cavernous casinos, riding the rollicking rides, shopping in the scenic super-malls – generally swept away by the sounds and scintillations of that surreal, synthetic city.

Las Vegas offers a special kind of fun. It won’t give you the expansive fun of trekking the desert or the aesthetic enjoyment of walking through Rome. It’s more like a B movie or a Keno girl cinched up in lace and silk stockings: a type of sensory indulgence that you can’t be proud of but you don’t feel ashamed of either.

I remember the reaction of Son Number Two, who was reading Will & Ariel Durant’s history of ancient Rome at the time. Shaking his head, he kept saying, “This is surely the end of the American Empire.”

One can’t deny that thought. In terms of size, sumptuousness, and spectacle, there is no other place in the world like Las Vegas. (I’ve not been to Dubai.) The vast, opulent malls America pioneered in the early 1990s prepare you for the size of it – and Disney World/Land can give you an idea of how friendly replica environments can be. But they are but cartoons to the masterpiece of marketing and merchandising that is Las Vegas. Las Vegas is a one-and-only and offers a sui generis experience to all who visit.

A World Unto Itself

Take the Bellagio…

The casino is larger than several football fields and jam-packed with roulette tables, poker bars, and one-eyed bandits. It has its own mall… a deluxe promenade that rivals Worth Avenue or Rodeo Drive, featuring the same deluxe stores (Gucci, Armani, etc.) you can now find in every major tourist city around the world.

Walking into the lobby you can’t help but be awed by Dale Chihuly’s Fiori di Como, a glass sculpture composed of 2,200 hand-blown glass flowers and covering 2,000 square feet of the ceiling.

In addition to dozens of casino-side eateries and buffets, the Bellagio offers at least a dozen first-class restaurants, bars, and nightclubs within its buildings, as well as several theaters.

Outside, a water show takes place every 30 minutes. It is a wonder of science – computer engineering and plumbing – that provides a spectacular, three-dimensional representation of show tunes and opera that ranges from charming to breathtaking.

And there is the Bellagio Fine Art Museum, which displays, I was surprised to discover, large (if not great) works by Picasso and other 20thcentury masters.

The first half of the Bellagio cost something like $1.6 billion in the mid-1990s. The second half, built later, cost more.

Defining Our Terms

Three billion dollars is a lot to risk on a new business. But was this a gamble?

Were the people that invested in the Bellagio back then gambling? Were they, like the people sitting at the casino’s blackjack tables and slot machines, risking their money against the odds?

Or would you call it an investment?   READ MORE

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From My Work-in-Progress Basket

Principles of Wealth #22*

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Tuesday, November 13, 2018

The efficient market hypothesis is bogus. The stock market, its sectors, and its individual stocks are often mispriced. But that doesn’t mean speculating on those errors makes sense.

Speculation is at best an intellectual form of gambling, like playing blackjack rather than roulette or craps. But all forms of speculation are likely to decrease one’s wealth over time. And every experienced speculator, in his heart, knows this to be true.

Selling speculations is not speculating. It is a form of business. And for some, it is a very profitable business.

 The prudent wealth builder that speculates treats his speculations as spending.

Delray Beach, FL.- In an essay published in Investopedia, Tim Parker writes: “Whether speculation has a place in the portfolios of investors is the subject of much debate. Proponents of the efficient market hypothesis believe the market is always fairly priced, making speculation an unreliable and unwise road to profits. Speculators believe that the market overreacts to a host of variables. These variables present an opportunity for capital growth.”

The argument Parker attributes to speculators is correct. The stock market is often inappropriately priced. And sectors within the stock market are badly priced even more often. Not infrequently, market sectors are grossly mispriced. The same is true for individual stocks.

I am always astounded when I think of how quickly and widely accepted the thesis of the efficient marketplace came to be. The logic, simply put, is that the big financial players – including institutional investors, hedge funds, and the like – have, through internet communications and computer technology, access to all of the key financial data they need to value stocks. They even have access to indices of public sentiment. With all that knowledge available and updated in nanoseconds, the price of any stock, any sector, and even the market itself will of necessity reflect the correct pricing.

This doesn’t make sense on several levels. For one thing, it is impossible to measure consumer sentiment or to predict its ebb and flow. More importantly, raw data (such as history of earnings, revenue growth, P/E ratios, etc.) cannot possibly give a reliable view as to the value of a company in the future.

I cannot tell you with any accuracy the true value of the equity of any of the companies I own and control. And I certainly could not predict what the value will be in six months or a year. So how could these data-crunching investment behemoths know?

But forget about the logic. Take a look at any 20-year period of stock market valuations and you will find moments when the market “corrected” itself, sometimes with a fall of 10% or more. What is happening there? There can be only one answer: irrational exuberance. And as I have already pointed out: You cannot measure accurately, let alone predict, the fluctuations of investor sentiment.

But that doesn’t mean that speculating is a reasonable way to accumulate wealth.

(Note: Hedging and arbitrage are not necessarily speculating. If done properly, they are the opposite. We will talk about them another time. This is about speculating and only that.)

What is speculating? John Maynard Keynes said it is acting as if one “knows the future of the market better than the market itself.” I like that definition because it emphasizes the core problem with speculating. It is fundamentally a bet on the future. And betting on the future is betting on something that is largely unknowable. Why bet on future possibilities when you can make good money investing in the known facts, the realities, of the present?

Professional speculators use sophisticated strategies such as swing trading, pairs trading, and hedging along with fundamental analysis of companies/industries and macro analysis of economics/politics to place their bets.

Just think about what I just said. The best speculators are crunching numbers from all these realms and using complex, technical strategies to make their decisions. And it is all done in the hope of getting way-above-average ROIs. It’s a whole lot of work. And at the end of the day, success depends on thousands of uncontrollable and even unknowable details. Where is the reasonableness in that?

John Bogle, bestselling author and founder of the Vanguard Fund, wrote a book called The Clash of Cultures: Investment vs. Speculation. In it, he demonstrated that individual investors almost always lose big when they speculate. He says that speculating is an “unwise” strategy for ordinary people whose goal is to safely accumulate funds for retirement.

“The internet and financial media may encourage speculation,” he says. “But that doesn’t mean you should follow the herd.”

Indeed. The reason the financial media and the brokerage community promote speculation is because they benefit from the fact that most speculators lose and lose big. And all those losses end up in the pockets of the brokers and the bankers and also the prudent investors that would rather invest their money safely for reasonable gains than gamble for big wins.

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost.

Miscellaneous Briefs

Speculation vs. Investing

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One sensible way to acquire wealth is to buy shares of stable, cash-rich companies and hold them for long periods of long time. Most people do something else. They buy a stock at a price they hope will increase, and they plan to sell it at a profit if and when it does.

Although both strategies are generally considered to be forms of investing, I prefer to reserve the term investing for the former and call the latter speculation.

Any dictionary will tell you that speculation is distinguished by the fact that it is based on incomplete information. And that is certainly true of most of what most people – professionals included – do. They have some partial knowledge that suggests a particular company’s stock price will move up. Based on that partial knowledge they put their (or their clients’) money at risk.

I am not saying that you should never speculate. But I do think that if you are going to speculate, you should not delude yourself by thinking you are making a sound investment.

There is a third way people buy stocks that deserves another name. I’m talking about investing in companies about which almost nobody knows anything and whose history of appreciation, in general, is very low.

The market calls this speculation but I think that, too, is a misnomer. When you invest in something that has a less than 50% chance of success, you are not investing nor are you speculating. What you are doing is gambling.

Again, I’m not opposed to gambling. Although it’s certainly a vice (like drinking and smoking opium), it is a vice that I have no objections to so long as the person doing the gambling knows his odds.

Miscellaneous Briefs

Investing, Speculating and Gambling: Let’s Get the Terms Straight

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One sensible way to acquire wealth is to buy shares of large, stable, cash-rich companies that pay dividends and hold them for a long time. (I am talking about investing in companies like Hershey’s and Coca Cola.)

This is called investing.

Most people do something else. They buy stocks of large, solid companies whose share prices they hope will increase for some reason. They buy them with the intention of selling them at a profit when they do.

This is called speculating.

Most people would not agree with that last statement. Most people – including most of the professional investment community – prefer to call this second type of financial activity investing too. They don’t like the negative connotation of speculating because it implies undue risk.

Ninety five percent of the investment activity in the world falls into this second category. Even the major media, on which the public relies for common sense, calls this type of transaction investing.

So what is the difference?

Any paperback dictionary will tell you that speculation is characterized by the fact that it is based on incomplete information. And when you buy a stock on the assumption that its share price will rise due to some anticipated short-term event, you are definitely relying on incomplete information.

For one thing, unless you have true inside information, you really have no idea that the event you are counting on will materialize. For another thing – and this is actually more important – you have no certain knowledge that the marketplace of investors will respond to that event by buying up the stock.

So this is one thing that every investor must understand: the difference between true investing, which is largely independent of specific future outcomes, and speculation, which is dependent on them.

If your broker or financial advisor is giving you this second kind of recommendation you must learn to recognize it as a speculation. Then, if you want to speculate, you can.

I am not saying that one should never speculate. (Although I should say this.) But I do think that if you are going to speculate you should not delude yourself by thinking you are making a sound investment.

There is a third way people buy stocks that deserves another name. I’m talking about investing in companies that are neither large nor well known but have the potential to enjoy large increases in their stock prices (which are generally cheap) due to some foreseen event.

The market calls such activities speculation but we should, to be honest, call this by another name. We should call it gambling. Gambling is defined as the purchase of an unlikely chance to profit. Any stock you buy whose chances of having its share prices go up over the long term (and virtually every cheap stock fits into this category) is a form of gambling.

Again, I am not saying that you should never gamble (though I should). I am just saying that you should know you are gambling when you do. Gambling – whether it is playing the slots or Keno, may be a fun way to spend your money. But only a fool would think that it is a way to increase one’s wealth.

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