Investing and gambling (long, rambling) - Posted by Nate
Posted by Nate on March 13, 2001 at 09:10:43:
I think there’s definitely something to be said for that.
I recall reading another book or article about Buffett a few years ago, and he made a statement to the effect that “diversification is simply a form of insurance against not knowing what you’re doing.”
This really rang true to me. The reason investment advisors tell “the masses” to diversify is that most of them DON’T know what they’re doing. If you don’t have the time or energy to put into researching companies to determine which stocks to buy and at what price, you probably ARE better off buying a mutual fund or simply investing in the DJIA or S&P or some other index. Or if you want to buy individual stocks, buy a lot of them so that if you make a mistake it won’t ruin you.
The flip side is that, for those of us who DO know what we’re doing, we SHOULD concentrate in those things because they will make us the most money in the long run. For example, I currently own some stocks, but I am seriously considering selling them and putting the money into real estate - something where I know what I’m doing (I think) - rather than hoping for a 10%-11% return annually (historical average) by leaving the money in a mutual fund.
Although investing and gambling are not exactly the same, there are some similarities. Another friend of mine always used to chide me at the racetrack for making too many different bets on one race. It was another example of me hedging against the fact that I didn’t know anything about picking winning horses (not to mention that there’s some random luck to it regardless of your skill at doing so). And you know what, I usually ended up losing more money than he did.
Or take craps, another example. The best best in craps is to play the pass line and LEAVE EVERYTHING ELSE ALONE. It is the players who throw side bets on several numbers at once that inevitably end up losing huge amounts of money. I once played craps in Kansas City for about 4 hours. I started with a $50 stake and ended up with about $200, playing the pass line. A guy next to me, who was making all sorts of side bets on every roll, had to go back to the ATM 4 times during that period, each time taking out at least $100 and sometimes $200. He ran out of money and left, broke, before I stopped playing.
Anyway, I know this was long and rather incoherent, but hopefully someone (besides me) will get a little wisdom out of it.