I am a planner. I don’t plan because I am worried about where I might end up without a plan. I plan because I genuinely enjoy the planning process. I’m sure that my enjoyment of the planning process is due to my Type A personality and the sense of control I feel when I decide how my ideal future will play out. I do not like uncertainty. After sitting down and pondering (planning) what the first post on my new blog about stock trading should be, I decided that I would start by talking about what plans I have been enjoying recently. My incredible wife will be defending her PhD thesis in chemical engineering in the coming weeks, and we plan on celebrating the culmination of her work by taking a trip to Las Vegas.
I enjoy gambling. This revelation might seem counterintuitive considering how much of a control freak I am, but there is an undeniable thrill inherent in taking risks. That being said, there is a difference between taking a risk and being risky. Nearly everything we do from the time we get up in the morning to the time we go to bed for the night involves some level of risk. Unless you live in a bubble, simply opening up your front door in the morning exposes yourself to a huge range of deadly microbes and wildlife. So why do any of us go out the front door in the morning? Because the risk of contracting ebola or being mauled to death by a grizzly bear in Manhattan or Houston or wherever your front yard may be located is very low. And most of us need to open that front door from time to time, don’t we? Most of us don’t have the luxury of working from home, so we must venture out to earn money, to go to the store, and to have fun. So we disregard the risk that a ninja assassin is waiting for us on our front porch because the risk of that scenario occurring is exceptionally small compared to the reward of experiencing the world.
So how do we decide what risks are worth taking and what risks are not? We compare the potential risk involved in an action to the potential reward associated with the action. Most of the time, we don’t make these decisions consciously. The tiny risk of getting stuck in an elevator is worth avoiding seven flights of stairs. Simple. But sometimes, we have to carefully consider the risks and rewards of an action before we make a decision. Should you ask that cute co-worker out on a date? What are the potential rewards? Well, she might say yes, and she might have a good time, and she might become your girlfriend, and you might eventually get married, and then you might consummate the marriage (that’s always how things should progress- just ask your grandmother). Sounds pretty rewarding, doesn’t it? So what are the risks? Well, she might say no, and you might feel embarrassed, and your friendship with her might be ruined, and she might gossip to all your coworkers, and they all might lose respect for you, and it could cost you that big promotion. Yikes. Now obviously the actual outcome would likely be somewhere between the worst-case scenario and the best-case scenario, but these are all someone reasonable risks and rewards that people consider every day.
So why is it that I enjoy playing roulette when I have absolutely no control over where that tiny silver ball will drop? Because, while I may not be able to control or predict where the ball will drop, the risks and the rewards involved in my bet are all crystal clear and statistically set in stone. Without getting into too many details, the “house edge” on a typical American-style roulette wheel is about 5.3%, meaning that, on average, for every $1 that you bet on a roulette table, you win back 94.7 cents. In other words, your “expected value” for every dollar you gamble on roulette is negative 5.3 cents. This negative expected value should come as no surprise, as casinos are not run for charity. This negative expected value should also tell you that, from a strictly financial perspective, the risks of gambling on a roulette wheel outweigh the potential rewards. So the question is: why would anybody that fully understands the risks of betting on roulette ever choose to do so? And the answer is that it’s fun to gamble. Personally, it’s worth 5.3 cents out of every dollar I gamble on roulette to play the game and enjoy the excitement and atmosphere of the casino (not to mention the free drinks…) Plus, there is a relatively high (nearly 50%) chance that I could win some money! And if there’s one thing I love more than money, it’s winning.
Unless you are a card counter or some other kind of cheat (activities that come with a whole different set of risks…), gambling in a casino is a risk that, financially speaking, is not worth taking in the long-run. If you are trying to get rich from blackjack, you are fighting a losing battle. However, if you have discipline, patience, a strong work ethic, and a little bit of common sense, the rewards of trading the stock market greatly outweigh the risks.
I would like to use this website as a platform to share what I have learned and shed some light on the trading techniques I have developed and used to achieve a 400% return in five years. Stay tuned…