The Best Bet You’ll Ever Make

The Motley FoolEventually, I succumbed. In the end, I made the long but, nevertheless, enjoyable journey from Downtown Singapore to Kranji to see just what all the fuss was about.

As I walked the few hundred years from Kranji MRT station to Singapore Turf Club, I could see plenty of glum faces coming towards me. It was a tell-tale sign that some punters have left the racecourse early… probably with less money in their pockets than when they arrived. It’s money that they will never see again.

For a few dollars less

Truth is, on most race days, there will be lots of people who leave Kranji with fewer dollars in their wallets and purses than when they got there. That is the nature of gambling. As an ex-bookie I should know.

Often I hear people equate investing in the stock market to gambling. Personally I have never made that connection. Thing is, when you gamble, you are participating in a game of chance with the explicit intention of winning. But by implication, if there are winners there must also be losers. It just stands to reason.

What’s more, it is the unfortunate losers who provide the spoils that are enjoyed by the lucky winners. Consequently, there is a transfer of money from losers to winners, simply because there is nowhere else that the money can possibly come from.

However, when you invest you are buying shares in an enterprise. The value of those shares reflects, over the long run, how the market perceives the company will perform in the future. If the company does well, then the profit that we make by owning the shares is generated by the extra value that the company is able to create.

Everyone’s a winner

What this means is that the profit we make from investing in shares is not the result of someone else’s losses but instead by the company doing well.

What is more interesting still is that even at the point when we sell our shares to another investor, there are no losers. In fact, when we sell our shares both parties are winners. That is because each person is better off by owing something preferred to what has been given up.

In the case of sellers, they get cash in exchange for their shares in a company that they longer want to own. In the case of buyers, they get shares in a company that they want to own in exchange for their cash. Both parties walk away from the transaction with what they want.

When I was at Kranji, I watched the faces of the punters who were clearly mesmerised by the rapidly changing numbers on the various totaliser boards dotted around the racecourse. As each extra dollar was wagered on a race, the odds for each horse in the field would change almost instantaneously.

I too was fixated on the changing odds, but for a completely different reason.

You never see an unhappy bookie

To the untrained eye, the odds merely represent how much you are likely to win if your chosen nag crosses the finishing line before another horse. But to a bookie, the collection of odds is simply an indication of the gross margin on the race. The bookie doesn’t really care which horse wins or which one loses. That’s why you hardly ever see a miserable bookie.

In each of the races that I observed, the gross margin was around 20%. In other words, for every $125 wagered on the races, the total liability or payout was $100. This is what bookies would call an over-round book.

What this should also tell us is that the expected return is not in favour of the punter. The upshot is that the longer and more often you gamble the greater are your chances of losing if you have average luck. And let’s face it most of us only ever have average luck.

By contrast, the expected return from investing in shares is overwhelmingly in favour of investors over the long term. Therefore, unlike gambling, the longer you invest in shares the greater is your likelihood of turning in a profit.

Your best bet

One of the best ways, I believe, to invest in shares is to drip money into the market continually over a long period of time. This means investing for years rather than taking a quick punt in the hope of making a fast dollar over a few days or weeks. Over time, try to build a wide portfolio of shares by investing in companies from different sectors.

Typically, try to build a portfolio of around 12 to 15 different companies in different industries. Some of your shares may be income-producing, while others may be growth-oriented. Once you have built a solid foundation for your portfolio, you may even feel confident enough to include one or two slightly more speculative shares if you crave a bit of excitement.

By diversifying and also investing regularly, your portfolio should be able to weather much of the short-term unpredictability that can give rise to the misconception that shares are a gamble…because they aren’t.

Betting on an investment such as shares that can deliver a positive expected return over the long term could be the best bet you ever make.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.