Saturday, November 30, 2013

You play, you lose... so what?

Every time you play roulette, you lose.

But sometimes you win? Yes... and that is why people play. If you can convince someone that sometimes they will win, sometimes they will lose (and hope that they don't step back and realise what is going on), they will play. Perhaps, as with roulette... they will know that eventually they lose, but the fun and memory of the big wins will keep them going back. If you are happy to pay that price for the fun - then all good, i.e. so what?. If not - then it is best to remember that you should ignore the 'actual result' and realise that ever time you spin, you are paying the house 1/37th* of whatever you put on the table.

The only time you will be paid for taking risk is if no one else is willing to take it. Supply and Demand.

That is why I think it is dangerous to think of investing along a risk-reward spectrum. There is absolutely no reason you should be paid for taking risk if lots of people are willing to take it. The reason Capitalism is so effective is because capital flows to those that grow it. Noise comes out in the wash.

The risk most people recognise is noise. It is the spin of the roulette table. But sometimes it is worth taking a step back and thinking about whether you are paying the house, or the house is paying you. The house only pays you if your capital is adding value. Risk isn't noise - it is the chance of losing your money AND the chance that your money isn't doing anything useful.

(*There are 18 odd numbers, and 18 even number, and zero - The houses edge is the zero.)

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