Wall Street Craps – 2012 Global Ebook Finance Award-Winner

Play The Long-Side Only: Leave the short-selling side of the stock market game for experienced traders to play. The mental discipline required to win consistently at short-selling is difficult for most investors to acquire and maintain.

Remember the words of legendary investment sage, Bernard Baruch (1870-1965), who once remarked, “Bears don’t live on Park Avenue.” While we all know that the market goes down for part of the time, it’s important to understand that playing the long side and participating in the upward movement of stocks has proven to be the more likely path to long-term investment success. If your objective is to make big money consistently over time, then stick with playing the long side of the market — betting on a gradual upward movement in stocks, rather than by playing the short side hoping for a quick collapse in prices. That’s because the stock market has an obvious bullish bias by spending significantly more time moving up than it does going down. (Note: The “long side of the market” or “going long” means to bet that a particular stock is going to go up in price. This is the traditional wager that stock market investors make.)

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“There is a way to make a lot money in the market; unfortunately it is the same way to lose a lot of money in the market.”

Peter Passell and Leonard Rose

There is only one primary area to invest your money for high liquidity, minimal transaction costs, ease of entry, low annual managment fees, capital appreciation, and good odds for success. And that area is the stock market by way of fundamentally sound strategies involving individual securities, no-load mutual funds, and a relatively new investment vehicle called Exchange-Traded Funds (ETFs), which will be discussed later in greater detail.

The American stock market is just one of many investment vehicles that people can choose to participate in. There are times when it is certainly appropriate and advisable for people to have a portion of their money in other non-stock market related investments, such as savings accounts, permanent life insurance, and real estate. However, the stock market offers one of the best opportunities to grow capital at higher rates of return over a shorter period of time. But in order to do so in today’s volatile stock market, you have to be able to consistently play this game in the proper manner.

That’s where the concept of Wall Street Craps comes in. It is a unique way of understanding today’s high risk/high reward stock market, by making an analogy to a Las Vegas craps game. I’ve chosen the game of craps as the metaphor model for the following reasons: (1) craps is the casino gambling game with the highest statistical odds of winning, (2) craps offers players the best opportunity to make a lot of money in a short period of time, (3) craps is a fun game to play, and
(4) playing the game of craps in the proper manner requires tactical skills, mathematical understanding, and disciplined money management — exactly the same things that people need to do today with their investment capital in order to succeed over the long term.

The purpose here is to help you play the stock market game with the same type of street-smarts that a savvy Las Vegas craps player possesses. This means that a player of the stock market game must be able to consistently place their bets in the right locations, in the appropriate amounts, and at the most opportune times. Those who aspire to win at this challenging game also need to develop the intuitive sense of knowing when to leave a “cold” money-losing table quickly, as well as when to stay longer at a “hot” money-making one.

As complex as the stock market may appear at first, an approach to winning at this game can be as simple as an investor chooses it to be. The method I am introducing here is simple enough for most experienced independent investors to understand. At the same time, it is sophisticated enough to play today’s volatile stock market for fast money with less risk.

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“I believe the true road to preeminent success in any line is to make yourself master in that line. I have no faith in the policy of scattering one’s resources, and in my experience I have rarely if ever met a man who achieved preeminence in money making – who was interested in many concerns.”

 Andrew Carnegie ~ American industrialist & philanthropist (1835-1919)

Bank & Bond Yields Are Not Attractive: Yields for bank savings accounts, domestic bonds, and money-market funds are near all-time lows.

These investment vehicles do not provide any chance to grow your capital at the higher rates of return that many people desperately need today. What many people do not realize is that bonds can be a place to lose money by decreases in the value of the underlying security. And while savings accounts, money-market funds, and other cash equivalents are at historic low yields, they can serve an important role in your portfolio as a temporary safe haven away from risk.

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Comment: Cash has its place as a safe haven. It’s just not a place to get much in the way of returns. However, there are ways to playing the bond market that closely follow the price patterns of the general stock market with lower risk and higher yield. For more on this, check out the Best Bond Strategy link on the right sidebar.

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“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

Benjamin Graham ~ Legendary stock market expert

Stay Away From Foreign Markets: The political risks and higher management fees involved with investments in foreign currencies and securities make these areas more challenging for average investors than similar domestic investments.

However, there are new ways to participate in foreign investments through domestic companies and specialized sector funds that make these games more reasonable to play for savvy individual investors with time for additional study. But overall you’ll discover that the U.S. stock market offers the best risk/reward trade-offs for your capital.

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Comment: The way to play foreign markets is through Exchange-Traded Funds. But I strongly discourage investor’s from venturing into this  investment realm. It’s easy to fall in love with the story of India, Brazil, or China doing better than the United States, but playing their markets is an entirely different beast. Unless you have a unique source of inside information, you’re better off ignoring foreign markets and put all you attention on the United States.

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“Most new investors try various markets, lose money, and finally acquire some knowledge through bitter experience. This is roughly analogous to learning how to drive by having a series of accidents.”

Samuel Case

Beware Of Alternative Investments: The hidden fees, low liquidity, and/or high entry costs associated with real estate, limited partnerships, insurance products, and managed investment accounts present problems for many investors who possess limited funds and short-time frames.

The appropriate place for these investment vehicles are with people who already possess substantial financial resources and can afford to put aside a limited portion of their assets without any pressure for liquidity, income, or immediate return.

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Comment: Alternative investments is an area that has attracted a lot of unsophisticated investors along with professional salespeople from failing investment-type businesses (mortgage brokers, real estate agents). It appeals to those public investors who blame their failures in the stock market on everyone and everything else except themselves. I frequently receive cold calls from people trying to sell me limited partnerships in land, oil, natural gas, gold, and land leases. I always ask, “If it’s such a great deal, why do you need me to participate? Why not go to the bank and convince them and you can have all of the profit to yourself?” The reason always boils down to risk which is understated. So stay away from “alternative investments” and the alluring stories of the professional salespeople who push them.

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“Investors operate with limited funds and limited intelligence. They do not need to know everything. As long as they understand something better than others, they have an edge.”

George Soros

Don’t Invest In Hard Assets Or Collectibles: People buy hard assets like gold and silver or collectible items such as fine art, jewelry, and rare coins at retail prices, but can only sell them at wholesale prices.

A player in these investment games usually has to get lucky on the upside to the tune of 15% to 20% just to break even. As a result, the odds of winning are too low. These games only seem to rack up consistent profits for those who are well positioned on the inside of the transaction. (Note: Expensive collectible items often incur additional costs related to storage and insurance. It should also be noted that these types of alternative investments are common with those investors who seek capital appreciation with unreported income.)

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Comment: The safe way to play gold is through the Exchange-Traded Fund that goes by the symbol of GLD. It is traded on the New York Stock Exchange and offers investors a convenient, low-cost, and efficient way to trade gold. Some people get into trading the shares of gold mining companies such as Newmont Mining or American Barrick Gold, but these stocks involve high leverage and management concerns. But in terms of physical gold, other precious metals, and collectible items, an investor must only think of them as illiquid speculations with poor bid/ask spreads. And in my book (literally), it doesn’t qualify as an investment game with good odds to play.

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“Quinn’s First Law of Investing is never to buy anything whose price you can’t follow in the newspapers. An investment without a public marketplace attracts the fabulists the way picnics attract ants. Stockbrokers and financial planners can tell you anything they want, because no one really knows what’s true. The First Corollary to Quinn’s First Law states that, even when the price is in the newspapers, you shouldn’t buy anythig too complex to explain to the average 12-year-old.”

Jane Bryant Quinn

Don’t Play The Options And Futures Games: Leave the options and futures investment games for the professional traders to play.

The odds of winning at these games are too low and the price of apprenticeship too high for part-time amateur players. For anyone who is not a pro, these games only serve as quicker ways to lose your money. If fast action is what you really crave, then it would be much safer to take an occasional trip to Las Vegas or Atlantic City.

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Comment: With the popularity of computer-driven charting methods, a novice can get a false sense of knowing exactly when to buy and sell options and futures contracts. But the real problem lies in not having the emotional experience of trading with their own money in highly volatile markets. While brokers who push the virtues of options and futures like to claim the benefits of limited loss (in the case of options) and unlimited reward potential, it really doesn’t dawn on an amateur investor what it feels like to lose 100% of their capital in a short period of time with no hope of recovery. A few experiences of this will quickly cure you craving for this kind of dangerous financial action.

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“Options carry a particular high degree of risk. Investing in this area without a good understanding of how options work is like running through a dynamite factory with a burning match – you may live, but you’re still an idiot.”

Joel Greenblatt

The Golden Nugget Hotel and Casino is one of my favorite places to gamble in downtown Las Vegas. If you walk into the front door of this casino, you’ll immediately find people gathered around the giant oversized slot machine near the entrance. Go another 20 feet into the casino, and you’ll see row upon row of assorted slot machines and table games such as blackjack, roulette, Caribbean poker, and craps. If you go further back into the Golden Nugget, you will eventually find the casino games of baccarat, poker, and high-limit Asian card games.

As a first-time visitor to a large gambling casino like the Golden Nugget, you can become awestruck by the intense action surrounding all of these different games of chance. In a similar way, a new person to the investment world can be easily overwhelmed by the many choices of where to invest their money. And like being at a Las Vegas casino, a person who chooses to play in the investment world must eventually make a conscious decision of what “games” or, more accurately stated, what types of investment vehicles to try.

For savvy investors, the choice of investments is largely determined by the game or games that give them the best statistical chance of winning. Otherwise, you become known in both the gambling and investment worlds as a “sucker.”

WHICH GAMES SHOULD YOU AVOID?

The investment world is also much like a financial casino in that investors have many different choices of where to put their money at risk. These choices include such things as real estate, stocks, bonds, precious metals, commodities, foreign currencies, options, futures, mutual funds, foreign securities, insurance products, limited partnerships, managed investment accounts, government notes, savings accounts, and collectible items such as fine art, jewelry, antiques, classic cars, rare stamps, baseball cards, and numismatic coins.

Most of these investment vehicles possess one or more major drawbacks for average investors. Meanwhile, all of these investment options have features that may sound good to average investors. It takes some experience to realize the big difference between what “sounds good” and what “is good” for investing in terms of transaction costs, management fees, liquidity, surrender fees, diversification, yield, risk, and profit potential.

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“The true secret of success in the investment and speculative world is not so much which good securities to buy, but rather which investments to avoid.”

Morton Shulman

A Savvy Investing Take: There are many ways to create financial wealth, and each one has a common ingredient: specialized knowledge. Realize that common knowledge will yield you only common results, but specialized knowledge when properly applied can lead you to riches.

If you choose to play the stock market game as a way to financial wealth, be sure that you acquire the kind of specialized knowledge that gives you the clarity to make consistently wise decisions. That is the only proven way to stack the odds of success in your favor when playing such a challenging game as the stock market.

There are many different types of investment games to choose from. But in order to become successful in the field of investing, you must decide to master only one game. Based on several criteria, the stock market game qualifies as a worthy candidate to master. When properly played, the stock market game offers good odds, high returns, low costs, and instant cash for both big and small players alike.

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“In spite of crashes, depressions, wars, recessions, ten different presidential administrations, and numerous changes in skirt lengths, stocks in general have paid off fifteen times as well as corporate bonds, and well over thirty times better than Treasury bills!”

Peter Lynch ~ Legendary portfolio manager