How to Think Like a Casino When Investing

Alvin Neo

Earlier this year, I had the chance to travel up to Genting Highlands – the City of Entertainment. We took a bus up and after weaving through a long, windy, sloping road, we finally reached the resort. The air was nice and breezy, with a cooling temperature of 25 degrees Celsius.

Upon entering the resort complex, a stark transformation of the environment unfolded before us. The forested area is now a bustling mega-complex with vibrant lights and swarming crowds. It is indeed the City of Entertainment, as there were countless shops, eateries, cinemas, gaming centers, and of course, a bustling casino. For many, the casino is the primary reason for their visit.

For most of us, we have probably heard of the age-old adage that the “house always wins”. So why do people still flock to the casino knowing that they will likely be losing money there?

I gathered some clues from the observations I made while I was there:

  • The illusion of control: Many patrons believed they possessed a unique skill set in games of chance, such as finding the perfect seat at slot machines to secure the next jackpot.
  • The thrill of winning: Returning customers seemed fueled by past successes, chasing the highs of significant wins from before.
  • Sunk Cost Fallacy: This cognitive bias leads people to continue investing time and money into something until they reach their desired outcome or until they run out of resources.

The odds were undeniably stacked against us upon entering the casino. This prompted me to ponder:
How then can we invest like a casino?

A casino’s profitability hinges on exploiting probabilities. While occasional wins may occur for players, the casino has strategically structured its games to ensure they profit over time. Rather than playing into the odds of the house by aiming for sky-high returns with low probability, we can become the house by seeking higher reliability of return over the long haul.

Investing in a globally diversified portfolio mirrors this approach. Though less glamorous than focusing on one bet that gives us a multifold return, investing in a diversified portfolio gives us a respectable return in the long term. While some businesses in the portfolio may fail and some might thrive more than others, the market as a whole gives us a reliable long-term return. For many, such reliable long-term returns are good enough to help us achieve the goals we are working towards in the first place.

A casino may experience short-term losses that outweigh their wins, yet as long as they sustain their operations, probability guarantees eventual profitability. Similarly, as investors, we can be assured during market downturns that our diversified portfolios will eventually rebound and go up in the long term. This resilience stems from the fact that a globally diversified portfolio is invested in real businesses. As long as demand for goods and services continues to rise due to factors like population growth, innovation, and increasing affluence, the market is poised to go up over the long term.

Finally, it’s crucial for casinos to maintain a robust balance sheet to withstand temporary losses without jeopardising their business. Similarly, as investors, establishing a safety net is important to safeguard against unforeseen financial hardships. The first layer of the safety net is an Emergency Fund consisting of at least 3-6 months’ worth of expenses in cash. This fund serves as a cushion during periods of income disruption, ensuring we can cover expenses even without a steady income. Additionally, the second layer of the safety net involves securing adequate insurance coverage to shield against major calamities that could otherwise wipe out our life savings.

The next time you walk into a casino, before you get mesmerised by the captivating lights and sounds of the gaming floor, remember to think like a casino.

This is an original article written by Alvin Neo, Client Adviser at Providend, the first fee-only wealth advisory firm in Southeast Asia and a leading wealth advisory firm in Asia.

For more related resources, check out:
1. Positive Returns Do Not Mean Enough Returns
2. Active Investing That Adds Value to the Client
3. What a Holiday Trip Taught Me About Investing

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