Showing posts with label Diversifcation. Show all posts
Showing posts with label Diversifcation. Show all posts

Thursday, January 22, 2009

Gambling or Investing is about Odds & Probability


I was watching this movie, The Best Bet in Astro Wah Lai Toi channel the other day, and the villagers are betting whether the main actor, Hor Yi ( played by Michael Tse Tin Wah) would stop gambling or not (since his whole life he have been gambling). The odds are as below:

A) If Hor Yi continues to gamble : Bet 1, Win 1
B) If Hor Yi stops gambling : Bet 1, Win 10

A Gambler might choose either one to bet, which gives him chance of winning, as well as losing. However, given this kind of "odds", there is a risk-free betting. Infact, with a simple tweaking, it becomes a sure win for your bet (regardless of the outcome).

If a person bets RM 1 on both outcome A and B, then that person can't lose. Either he break-even if Hor Yi continues to gamble, or he wins RM 9 (Win RM 10, but lose RM 1 on the other bet) if Hor Yi stops gambling.

Now, if that person changes his bet to
  • Bet RM 5.5 on outcome A above, and
  • Bet RM 1 on outcome B above
The person who bets the way above would 100% win RM 4.5 (from a total investment of RM 6.5) regardless of the outcome (either Hor Yi wins, or Hor Yi losses). This is no longer gambling (or speculating). But it's investing, as long as the person whom you're betting is credible to pay the claims.

My mother used to say that anything that involve winning or losing is gambling. Looking back, I've realised that her statement is very true indeed (though i'm not sure she knows the distinction between investment and speculation when she said that statement). A person who invest the right way, would only have a win, and can't lose (over the long term).

Take for example the Owner of a casino. At a particular table at a particular round, the Banker might lose. However, played over enough rounds, the Banker will almost guarantee themself to a win. Infact, i don't think Genting's Casino ever lose money in their Casino business at any single year (though i can't say the same thing when it comes to days or hours).

Similar post is in the Movie 21 here.

Friday, December 19, 2008

What Warren Buffett says about Diversification

This is one of the question asked by one of the student about Diversification to Warren Buffett. The entire video is available here : http://video.google.com/videoplay?docid=-6231308980849895261 . I strongly recommended to see the video!.




Says Buffett, "If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all — that is the way they should approach it."