While gambling remains a controversial and often derided practice, it is continuing to earn credibility in the Western world. In the U.S., for example, a number of states including Nevada, New Jersey and Delaware have recently decided to legalize online gaming and create a well-regulated and fully licensed industry going forward. Similarly, the Australian government is also giving credence to research by Casino Reef, which suggests that the government could generate an additional $201 million per year by legalizing and regulating online gaming operators.
This research offers an insight into the mind-set of government officials, who have come to realize that by monetizing online gaming and traditional gambling they can generate millions for their nations’ coffers. Such a revelation will come as no surprise to gamblers themselves, many of whom operate professionally and have learned to apply genuine investment strategies in order to boost their returns.
With this in mind, let’s take a look at the investment strategies and lessons that can be learned from gamblers. Consider the following:
1. Determinism and the Natural Laws that Govern Change
Determinism is a concept that underpins both gambling and investment, but despite this it is not universally applied by financial traders. It is essentially a philosophical disposition that suggests that for every event or action, there exist conditions that could cause no other event. These ‘conditions’ are the natural laws that govern change, and ultimately determine whether an investment strategy is successful or otherwise. Gamblers and investors who apply determinism are able to negate external factors and so-called random events, as they have a genuine comprehension of the consistent, underlying factors that trigger change.
2. The Gambler’s Fallacy and Delving Beyond Randomness
Comprehending and determining patterns in random events is central to a gambler’s success, while investors who trade in a volatile financial market can also benefit from this practice. If you were to ask the majority of people to predict the outcome of 100 imaginary coin tosses, for example, most would limit the sequence of consecutive heads or tails in the mistaken belief that this is statistically less likely than a more random alternative. This is despite the fact that both outcomes are equally likely, and this misunderstanding is often referred to as a ‘gambling fallacy.’ Investors must strive to learn from this, as otherwise they are likely to develop a flawed strategy that misunderstands the nature of randomness.
3. The Fundamental Principles of Card Counting
One of the first people to successfully identify patterns and apply strategy when gambling was physics graduate Ed Thorp. He is renowned as the pioneer of card-counting, which is specific to casino games such as blackjack and enables participants to determine the odds of winning and losing the next hand simply through a process of recognizing which cards have already been dealt.
Gamblers with this skill can also apply this methodology to determine their precise odds of winning and the amount that they should stake, which on a fundamental level should form the basis for any successful investment strategy. This is the ultimate example of identifying patterns in random events, while the use of basic mathematics also creates an opportunity to optimize profit and minimize loss.
4. The Establishment of a Loss Limit
As any professional gambler will testify, establishing a loss limit is central to long-term success. This can be applied on a daily, weekly or monthly basis, but its fundamental principle is that you identify a set amount that you can comfortably lose within any predetermined time frame. A loss limit of approximately 50% of your capital is best advised, and once you have reached this you should cease playing. The same principle applies to investment, especially in margin-based markets such as the foreign exchange or similar, derivative-inspired sectors. This is why the majority of online brokers offer stop-loss features on their trading accounts, as this allows traders to include this as a crucial feature of their strategy.
5. Distinguish Between Strategy and Philosophy
You may well have heard the term ‘risk averse’ in relation investment, and this replies to cautious operators whose main aim is to offset loss rather searching for vast profits. This is often described as a strategy, but this is a common misconception that can prevent you from operating profitably within your chosen market. Your appetite for risk is simply a reflection of your innate persona and philosophy as an investor, and this should only be used to influence a wider, technically sound and analytical strategy. Gamblers will testify to this, as those who operate solely on emotion and their instinct often find themselves in the grip of heavy losses.
6. Apply Human Behavior to Adapt Your Strategies
There are many forms of gambling, from online casinos and game rooms to face to face mediums such as poker. The latter is particularly challenging, as it requires participants to play both the game and their competitors simultaneously. An understanding of human psychology and behavior is therefore beneficial, as it can then be applied to interpret mood and pre-empt the actions of others. This theory also has connotations when making an investment that requires direct interaction with another person, such as buying a house or a new car. Through the course of conversation and negotiation, you can use your knowledge of psychology to gain an insight into the vendor’s thought process and tailor your bid accordingly. This can help to drive down the initial investment required and subsequently maximize profits.
7. Understand the Rules of Your Game and Its Requirements
Above all else, it is important to remember that all successful strategies are based on a solid foundation of knowledge. Gamblers are forced to understand this, as without an understanding of the individual games that they play or their unique intricacies it is impossible for them to even participate, never mind prosper. Investors must take heed of this, as each financial market and asset has subtle differences and is therefore likely to require an alternative strategy if they are to achieve optimal returns. It is also important to understand taxation laws before participating in a specific form of gambling or investment, as both are subjected to changeable capital gains tax legislation depending on your location and the activities that you engage in.
8. Develop a Diverse and Rewarding Portfolio
Having an understanding of individual games and gambling mediums also enables you to select the options that are most suitable. While this is a good foundation from which to start, it is important to develop experience and aptitude in other areas so that you can successfully diversify your earning potential and revenue streams over time. This is arguably even more important for investors, as having the ability to operate in numerous financial markets means that they can adapt their strategy and distribute capital in line with prevailing market trends. Without this, you may be trapped in a depreciating market that prevents you from maximizing your returns.
Featured photo credit: Farm 6 via farm6.static.flickr.com
Author: Lewis Humphries