The Stock Market Casino: Play it like BlackJack

The Stock Market Casino: Play it like BlackJack

We have all heard terms like “Wall Street Casino” and “stock market casino”. In some cases, the terms are used by companies promoting investments in gold and other precious metals or commodities. In many cases, the intent is to convey the idea that the financial markets are by, for, and of seasoned, possibly unscrupulous professionals and that small or “amateur” investors stand no chance and are doomed to lose money. Which is why it is important to be careful as you invest in stock market. You can easily lose your money and face critical loses. This is where qqturbo is going to help you. You can easily learn the art of investment and management with the tips and recommendations there.

In many ways, the analogy is a fair one. Casinos exist to make money. The majority of their revenue is the result of separating gamblers from their bankroll. However, there are casino games and casino games. In a simple game of casino blackjack, the ” house’s edge” is about 5% if the player hits and stands according to the same rules as the dealer. If the player makes his decisions on when to hit or stand based on some simple arithmetic principles, he can roughly cut the “house’s edge” in half. If he goes one step further and “doubles down” or “splits a pair” at the right time (again, purely based on what the numbers he sees tell him), the “house’s edge” is halved again, down to a little over 1 %, at least giving the gambler a fighting chance. Teams of professional card counters can actually flip the “house’s edge” in their favor. Short of being a professional gambler, just understanding the numbers and knowing how to play make a huge difference. One of the keys is having the discipline to make your decisions based purely on numbers, leaving any emotional component out of the equation.

The financial markets are fraught with potential perils which make a casino game look tame by comparison. High frequency trading, hedge funds, and synthetic financial derivatives are among the vehicles which give large investors tremendous leverage and can cause the markets to swing wildly, both up and down. The small investor can feel as though he is being swept along by forces he cannot see and does not understand.

You can insulate yourself from unseen markets forces by staying away altogether. However, the trade-off for the safety of not risking your capital is accepting money market returns of less than one percent. A better approach is to position yourself like a blackjack player would, making decisions based on the numbers, not emotion. Many books have been written about market psychology and the chemical changes which take place in the human brain as investment (and gambling) decisions are made. The small investor must successfully fight human nature in order to make decisions unemotionally and avoid the trap of “Buy high, Sell low”, resulting from uninformed wishful thinking followed by panic.

Some simple facts that most of us know and understand but frequently ignore are:

Over time, the broad stock market indexes have an upward bias.    The broad markets always “revert to the mean”. ie If the S P; 500 is above the 50 and 200 day moving averages, it will eventually fall and cross both curves. Conversely, if it is below the 50 day and 200 day moving averages, it will eventually rise and cross both curves.

Just knowing the above two facts is not, in and of itself, sufficient information to make informed investment decisions. The S P; 500 has been basically stagnant for both a 5 year and 10 year period. Most of us don’t have enough time to rely purely on the “upward bias” effect.

So, what do you do?…

  1. I avoid individual stocks. In spite of laws that have been passed in reaction to financial crises , are you 100% confident that there is not another ENRON lying in wait for unsuspecting victims? Even if a company is not engaged in criminal activity, you can still be undone by ineptitude ie KODAK. Investing in index funds smooths out the bumps which can be caused by one company’s misfortunes. Also, although not predictable, the broad indexes do conform somewhat to a semi-regular pattern. Specifically, the 50 and 200 day moving averages of the S P; 500 (and the Dow 30 and Nasdaq , and other broad market groups) resemble a long, lazy, irregular sine wave with a slight upward slope.
  2. I try to invest new money in index funds ( I typically stick with something which mirrors the S P; 500 or 2X the S P; 500) mainly when the market is below the 50 day and 200 moving averages. My wife and I follow this pattern in her retirement account; 75% of new money goes into the index fund when the market is where I want it, only 15% when it’s above the curves. If you do nothing else, following the discipline of investing in index funds only when the market is below the 50 and 200 day moving averages will serve you well. The chart below illustrates this point. The rough circles I’ve drawn take in the time periods when I would have recommended pouring money into an index fund. The rough middle of each shape is marked and the resultant average entry point comes out to about 1113 on the S P; 500. By comparison, the lowest S P; 500 close in this period of time is 1023, only 8.8% below the average entry point, while the highest close is 1364- 18.4% above the average entry point. Following my recommended discipline based only on the numbers tends to get you into the market much closer to the bottom than the top.
  3. In my own retirement account, I trade more frequently and aggressively. My approach can be explored in more detail at www.index500trading.com . However, I still prefer to enter an index fund (in this case S P; 500 2X) below the moving averages. The additions are : taking short term profits rather than emphasizing a long term approach and using a Dow 30 2X Inverse Fund either as a pure offensive play or to protect a long position when the market is heading down.

When it comes to stock market investing, think like a blackjack player. Make your decisions based on numbers and leave emotion out of the picture.

Seth

Seth

Seth is a professional blogger and is a Poker enthusiast. He wants to share his wisdom with other poker players to help them improve their game. He also loves to write about art and technology as well.

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