Gambling or Investing?

My first memory of taking a risk with money was when I was 7 years old. My father and I were spending several days at Taganrog - a popular seaside resort town in the southern Soviet Union at the Black Sea. My father, an Economist with a Ph.D. from Moscow State University (considered to be the ‘Harvard’ of Russia), was giving lectures on capitalism and democracy at the local conference and he took me along on the trip.

One evening after he finished lecturing, we went downstairs to the hotel lobby and sat down in front of one of their electronic poker stations, a 5 card poker slot machine. My dad inserted the coins and started to play. After the initial round of betting, the screen would spit out three cards. You would bet again by pressing a big red button and another card was drawn. After the final round of betting, the fifth card was displayed. If you hit a preset poker hand, such as a pair, you would get a payout corresponding to the size of the bets you made along the way and the strength of the final hand. Getting a ‘four of a kind’ was the ‘holy grail’ - accompanied by flashing colors and celebration sounds as the coins poured out into the tray.

The gambling night with dad felt very long. After some initial victories, we sat for what seemed like hours, loosing many hands in a row. The cards just “didn’t turn up right” - Dad would say - as he kept putting the coins back into the machine. I was starting to hate the whole thing. I questioned whether the machine was fixed against us? “Dad” - I would say - “Don’t you think they would write the program to make us lose on average? Let’s get out of here”. “Son, it’s all just a game. It’s fun” - he would reply, trying to sound entertained while I could see the stress on his face.

I will never forget that sinking, gut-wrenching feeling of loosing money. It is so unpleasant. It made me feel nauseous. No amount of winning ever seemed large enough to offset that awful feeling of financial loss. In the end, you keep playing to feel good again, but the odds are against you, so the more you strive to feel good again, the higher the chances that you are heading towards zero.

The stock market can be a casino to some, and a solid investment to others. During the past two weeks I have been traveling in Europe from east to west and have spoken to many different individuals. As soon as they learn that I help people invest, they start to express their common worries and concerns about the future (politics, economics, and environment) and their impact on the markets. I recognize the same worry in their eyes that I held as the kid watching my dad in front of the poker machine. Hope, fear, excitement, anxiety, celebration, pain - shuffle endlessly through the body. Some people explicitly think of the stock market as gambling, but many more have those these feelings while trying to express logically that prudent investing for the long-run is one of the best financial decisions they can make.

Investing in the markets without a personal investment philosophy that enables you to make clear decisions under uncertainty is much closer to gambling because you know in your gut that a bad market move can make you quit - go to cash - and walk away with that loss locked in and the future gains surrendered.

Perhaps subconsciously, that’s why I became a quantitative investor. I wanted to write my own program with the odds of winning tilted in my favor. Systematic, rules-based investing based on the concepts that fit with my beliefs, gives me a sense of peace through the turmoil and uncertainty. While I feel fulfilled offering my investment approach to others, even more so, I wish for all investors to discover, develop or adopt their own solid investment frameworks that they won’t give up on when things get hard.