3/13/14 – Some Thoughts on Las Vegas, Gambling, and Investing

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 13, 2014 10:04:18 AM

and tagged Economics Lessons

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Las Vegas is a remarkable place. I haven’t been here for 15 years or so, and there’s been a tremendous amount of development in the interim, but as far as I can tell through faded memories, the place remains substantially the same: buildings you’d never see anywhere else, miniature replicas of other parts of the world, and a commitment to spectacle that’s hard to imagine if you’re not actually here.

From my window, I can see the Treasure Island pirate ship, the Venetian with its indoor canal, the Trump casino rising from what appears to be a surrounding wasteland, and the appropriately named Mirage, all set in front of a mountain range that looks like it cuts off the bottom end of the sky.

The sheer amount of accumulated wealth and capital it took to build all of this in the middle of a desert is astonishing. Even more astonishing is where the money came from—mostly gamblers who hoped to win and wound up leaving their cash here.

Oscar Wilde called second marriages the triumph of hope over experience. Las Vegas is the ultimate expression of that triumph. Anyone who thinks about it knows you can’t build billion-dollar hotels and casinos by letting gamblers win in the long term. Las Vegas is the ultimate zero-sum game, where every dollar the casinos make comes from the pockets of the losers.

And, in many cases, that’s okay. People come for fun, for the shows, for the excitement. They make a choice, knowing the odds, and come to play and pay. Just as with investing, the problem is the people who don’t know the odds.

I’m here at Commonwealth’s Chairman’s Retreat to talk about investing, which has some striking parallels with gambling. Both are mathematically similar, involve expectations of gain that may or may not be realized, and tap the deepest of human emotions—fear and greed. Holding this conference in Las Vegas is very appropriate.

The differences between gambling and investing are even more apparent, though. Investing is, or should be, a positive-sum game, with the capital provided used to grow the economy so everyone benefits. Investing is, or should be, a longer-term process, not fixated on the current roll of the dice or turn of a card. Investing is, or should be, a tool to build a better life and expand your resources, not an entertainment where you ultimately end up losing. The ultimate difference is that investing is, or should be, a triumph of experience over hope, where you rely on thoughtful analysis of the present and past rather than crossing your fingers and hoping things turn out for the best.

If not, you’re simply gambling.

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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