The Difference Between Investing and Gambling
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Ever wanted to know the difference between “investing” and “gambling”?
Probability. Simple as that.
Gamblers choose to bet their money on low-probability outcomes and usually don’t put much, if any, effort into raising those probabilities.
Investors – the good ones, anyway – try to put the odds on their side. Picking high-quality stocks, using trailing stop losses, and trading with the trend are all methods we’ve discussed before that raise your probability of success… and there are countless more.
Gambling doesn’t have nearly as many options to do that. So it should be no surprise that there are far more wealthy investors than there are wealthy gamblers.
But there are exceptions. Some gamblers manage to find an edge, exploit it, and make a fortune for their efforts – just like the world’s wealthiest investors do to continually rack up wins.
For a great example, look no further than the master of the roulette table…
The Roulette Millionaire’s Secret
Richard Jarecki, a medical doctor by trade, won so much money at European roulette tables that all the casinos in Europe lived in fear of him – going to great lengths to ban him from the casinos and even the country.
By 1969, he was considered “a menace to every casino in Europe,” according to Robert Lardera, managing director of the Sanremo Casino (one of Dr. Jarecki’s favorites, located on the Italian Riviera).
“I don’t know how he does it exactly, but if he never returned to my casino, I would be a very happy man,” Lardera said.
Jarecki’s success is a masterclass in probability. He took a game where the odds are always in favor of the house and figured out how to tilt them in his favor instead.
As word of his exploits grew, Jarecki became a minor celebrity in the gambling world. Swarmed by reporters and casino operators who wanted to know how he was beating roulette, he told them he had the help of “a powerful computer” at the University of London.
But this was actually a cover story to throw them off the scent — and to discourage others from trying to copy his methods.
Jarecki used no wires or computing devices or sophisticated means of cheating. He simply paid very close attention and observed probabilities.
You see, a roulette wheel is supposed to spin perfectly. But small manufacturing defects, coupled with the wear and tear of spinning hundreds of times per night, can cause a roulette wheel to show a small bias in the way it spins.
Jarecki would watch a roulette wheel, sometimes for thousands of spins. He noted any hidden bias that he saw — a slight deviation toward red or black. And then he devised a betting strategy to take advantage of that bias, which was often so subtle that nobody else noticed.
The standard French roulette wheel has 36 slots for the ball to land in, plus one numbered zero. If the ball lands on zero (or an additional double-zero on the American wheel) the casino automatically wins. This is what gives the house a small but permanent edge over the typical roulette player – odds of 2.6% in Europe, and just over 5% in America.
The French wheel used in Europe was slightly easier to beat (due to the lack of a double-zero), and Europe’s casinos were also more accommodating to high rollers on a winning streak. And so, although he visited Vegas from time to time, Jarecki preferred Europe’s casinos over America’s.
It must have been tedious watching all those spins. Then again, hanging out in Monte Carlo and other such places, surrounded by glitz and glamour as he won huge sums, Jarecki might have felt like a real-life James Bond.
Either way, Jarecki made his fortune by putting the odds in his favor – through the careful use of probability – at a game that couldn’t otherwise be beat.
Jarecki passed away in 2018 at age 86. He made more than $1.2 million from roulette in the 1960s and early 1970s (more than $8 million today, adjusted for inflation).
Now, why share the story of a gambler when we’re talking about using probability as an investor?
Because most investors are happily handing over their money to the house, when they could be raking it in like Dr. Jarecki… or even the house itself.
If You Can’t Beat ’Em, Join ’Em
In the stock market, far too many investors act like the typical roulette player.
They don’t know how to put the odds in their favor, and they’re playing a game where the house edge is against them. (Fees and commissions on Wall Street are like the zero and double-zero in roulette. No matter what you do, the house takes a cut. And Wall Street is the biggest “house” in the world.)
But by learning to use probability — like Jarecki did — you can find ways to put the odds in your favor, even on Wall Street. If you can do this successfully, it’s like playing a different game than everyone else.
And unlike the casinos, the stock market can’t ban you for being a winner.
The window of opportunity in roulette is closed now. The wheels are manufactured with far more precision today… and the casinos are far more vigilant with maintenance.
But a far bigger window of opportunity exists in the stock market.
Even better, it puts you in a position that’s more like the house itself… by using a high-odds trading technique that pays out when other traders make a low-odds move.
At TradeSmith, a big part of our mission is opening the window of opportunity for the average investor, by sharing our proprietary insights into odds and probability and statistical-analysis techniques – all to help the small investor win.
Part of that mission is also education – showing investors how to access effective wealth-building strategies.
All The Best,
Keith Kaplan
CEO, TradeSmith
P.S. Last week I asked you to tell me about your favorite, go-to TradeSmith tools. I’m thrilled and thankful that so many of you shared your thoughts and questions. (If you’re interested in seeing more of that feedback, be sure to read yesterday’s TradeSmith Daily.)
So this week, I’d love to hear from you again. This time, tell me what you’d like to learn more about. With investor education at the heart of our mission, we do better when we know what you want to learn.
Do you need more information about trailing stops and the Volatility Quotient, like we discussed on Friday?
Or are you interested in options? (I happen to love trading options, but I know that many investors are hesitant.)
Let us know what direction you’d like us to take at [email protected]. And thanks again for reading!