Tuesday, September 07, 2004

Investing, Casino Style!

Back in the late 90s and 2000, there was lots of talk about the Nasdaq and tech stocks being "like a casino." Speculation was rampant, and many investors jumped into the latest hot stocks thinking that fortunes were easy game for those who "get in now." In retrospect, we all know that this investing craze was a mania, like the "tulip mania" in the past. But we still liken the fast action in the late 90s and 2000 that of a casino.

Certainly, from the investor side, this is true. Much like the slot players throwing coins in the one-armed bandits, the clicking of the mouse button at online broker websites simulated casino-like action, albeit without the free cocktails and noise! At least one could simulate the casino noise by turning the volume on high with the TV on CNBC. Office small talk and conversations at parties and the gym were focused on the latest hot stocks and how much money was being made in this new era of investing.

In the real world of casinos, players line up at tables and slot machines seeking to strike riches much like the stock investors in the 90s-2000. But the other side of casinos is the casino itself. Casinos make money by returning 98% of money back to the players. It's the small percentage over a long period of time that results in large amounts of profits.

Every mouse click resulted in a transaction for the broker, who made money no matter which direction the stocks moved. The broker made money on the volume and hype in the market. The market makers and stock exchanges made money for facilitating transactions, no matter who made money long or short. It just doesn't matter who is right and who is wrong if one gets to take a little out of the middle on entry and exit.

As an investor, it makes more sense to be the casino than to be the player. Over a long period of time, seek to make small percentage moves in investments that will compound and grow.

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