Saturday, January 16, 2021

Gambling is Not Investing!

Every generation has to discover for themselves that gambling is not investing.

Strike it rich!  That is the mantra that everyone wants to follow.  And there is a narrative that our society promotes in this regard - again, the loud, neon-sign carnival message that the television, and today, the Internet, try to promote.   The idea is this:  You can invest some money in some scheme and make millions, overnight, without any real work or effort!  Usually with a lot of exclamation points!!!

It is a narrative that is used to sell everything from house-flipping systems, to time-shares, to gold coins, to pyramid schemes, Ponzi schemes, to crappy "tech-that-is-not-tech" IPOs and so on and so forth.  They sell this idea using backward-looking data, or selectively choosing start-points or end-points, or creating historical fictional trades that only illustrate hypothetical profits you would have made in the past, not what to expect in the future.

Such narratives often trivialize the amount of effort involved in creating wealth.  Jeff Bezos has billions of dollars - and he started out selling books on the Internet!  Gee, how hard is that, right?  Not shown: years of struggle and hard work, as well as setbacks in the interim.   Yes, it is true that some people "get lucky" or at least are in the right-place-at-the-right-time to make a fortune.  But predicting who will be in the right place is nearly impossible without a working time machine.

I use Bill Gates as an example.  The mythology of Gates and Microsoft is that Bill invented the Personal Computer, or maybe Windows or at the very least, the operation system (O/S) and had a vision for the future and thus was able to make Billions.  The reality - known to anyone who grew up in the PC era - was that IBM stupidly dumped a contract in his lap that gave him rights to sell copies of DOS.  IBM did not anticipate the "PC Clone" market would quickly eclipse IBM's own market share.  No one realized back then that hardware would become a commodity sold on price, and that software would be the real money-maker.   Windows?  Something that Gates and Jobs both copied from Xerox PARC.  Not a lot of "vision" going on there - just right-place-right-time and a little luck and of course a whole lot of hard work.

Had history gone another way, Gary Kildall would be a Billionaire and Digital Research would be the Microsoft of today. Or maybe the executives at Xerox wouldn't have said, "we're a photocopier company" and shut down the Palo Alto Research Center and handed the GUI and Mouse, free of charge, to Microsoft and Apple.  Maybe.  Maybe "Tom" wouldn't have screwed up MySpace and Mark Zuckerberg would be living in his parents' basement.

Maybe.  But that is not as sexy a story to sell to the plebes.  You show them that some folks end up winning big at this game we call "Capitalism" and suggest that what you are selling will be the next big thing as well.   Invest in the Juiceroo IPO!   It is sure to go ballistic!  People need more counter-hog appliances, in addition to their Keruig, their Insti-pot and now the air-fryer!  The juicer will fit right next to that!  Or maybe not.

Car sharing!  That has to be worth billions!  And indeed, some folks made a lot of money on ZipCar, but a lot more lost their shirts before AVIS bought it out.  Don't hear much about that these days, doya?  Yet at one time, it was the darling of the financial press and the "wave of the future" - never confuse publicity with substance.  Hell, back in 2008 everyone was abuzz about the Elio - which is now a punchline to a bad joke.   Or the Segway?   That went bust a few times, and one poor sap who bought the company ended up driving his off a cliff.   The Chinese companies who made knock-offs ended up buying the company for pennies on the dollar.

I suspect that for every dollar made by some people on these "next big thing!" deals, some other schmuck loses two dollars.  And guess who that schmuck is?  You and me.  You might as well buy lottery tickets.

I have noted time and time again in this blog that you don't have to sit down with a pencil and "do the math" on every damn thing that comes down the pike - but you should before you invest in something.  But most of the crap out there - 99% in fact - you can spot as a scam just how it is presented.  If the shouting guy on cable tee-vee says it is a good deal, odds are, it isn't.  His investment track record is worse that monkeys with dartboards.  So why is he on the air?  Well, he is colorful and shouts at the camera, and he's popular.  The Kardashians are popular, too - I don't suggest them as role models.

Sure, Billionaires can afford to throw money at ideas that might take off - and afford to lose money on 90% of them.  The one idea that does take off, makes up for their losses.  You and I?  Well we can't afford to invest in 100 different "new technology" ideas or whatever, so we have to try to pick a winner, and hope we are right.   The odds are not in our favor.

Compounding this problem is that those Billionaires are counting on us throwing money at these ideas.  These Billionaires invest money in a company, do a lot of publicity (again, the neon carnival comes to town) and then "drop" and IPO, which creates a market for the stock they paid little for (in terms of dollars per share).   You and I, bedazzled by the prospect of riches, buy these stocks.   Once in a while we don't lose money and might actually make a little.  Most of the time, though, we lose.  The Billionaires?  They make 10x or 100x their money back.  The best we can hope for is doubling or tripling our money.

Now, if this sounds like a Ms. AOC anti-capitalist rant, it isn't.  You see, the beautiful thing about the free-market system, besides the fact it is the default mode of operation of the human species and cannot be denied or legislated away, is that you can choose not to participate in other people's schemes.   It is like the casino - another place filled with bright flashing neon signs enticing you into "invest" in a slot machine or a blackjack game.  Hey, all the media tells how fun it is to gamble!  And who knows?  Maybe you will go home a winner!  Or more likely, not.

It is no different than payday loans or rent-to-own bling rims.  Maybe in a Communist country, the Commissars would outlaw such things as exploiting the poor and an unwise use of natural resources.  The world would be a slightly duller place, as a result, however.   On the other hand, no one put a gun to anyone's head and forced them to take out a payday loan or spend $3000 on rims for a $500 car.  That is the nature of freedom - you have to have the freedom to make bad choices in order to be free.

And besides, why is it the government's place to tell us what is a bad choice and what is a good one?  Once in a while, the risk-takers are right, and get rewarded with Billions for taking the right risks.  Central control by the government usually results in poor decision-making.  The reason why Boeing dominated the aircraft market after World War II has less to do with them creating brilliant designs, than with the Brabazon Committee in the UK that dictated to industry, what designs to produce.  Hey, why not have "Lord Brabazon" decide what is best for all of us?  It is only fitting that they named the biggest mistake - a bloated, obsolete, under-powered and unreliable aircraft, after him.

But I digress.

The point is, Communism sucks - and so does Capitalism.  But at least under Capitalism, you have a choice to squander your money, instead of the Central Committee deciding to squander it for you.  You can chose to invest wisely, or choose to gamble.   My personal philosophy is that since I am not super-smart, that if I try to swim in the shark tank, I will be eaten by the sharks.  On the other hand, if I buy things that I understand, I will make a decent profit and be able to live without working.

We bought real estate not because the "Property Twins" were hyping "buy-and-flip" on the TeeVee - indeed, such shows didn't exist at that time.  When they started to be broadcast, we sold out, because the carnival had clearly come to town at that point and none of the real estate prices made any sense.  People told us we were "too dumb" to understand this "new paradigm" where profit and loss were no longer relevant!   Of course, 2008 came, and everyone lost their shirts.   We didn't.

I shied away from dot-com startups and bought "boring" dividend stocks and mutual funds instead.  Maybe I didn't become fabulously rich, but I did retire at at 58.  My friends who had schemes and systems, and "hot stock picks!" are still working - many losing a lifetime of savings in the process.

It is sad, this 401(k) deal that our generation got forced us all to be investors.  The next generation doesn't even get that - they are all "contractors" working "side hustles" and "gigs" and trying to get ahead with a few dollars thrown at an IRA.  And we wonder why they are angry and voted for Ms. AOC.

Maybe we can't change the world - although I think some change will occur in the next four years, just not as dramatic as some would like.   Even with these changes, it still will be our responsibility to use our money wisely.  There will still be scams and cons and rip-offs, bad bets, bad investments, hyped IPOs and overvalued stocks.  We can choose not to invest in them.

What started this was a reader asked me about Bitcoin (yet again) and Tesla stock.  In a classic case of backward-looking statistics, we can say that we should have bought these back in the day.  But knowing then what we know now, we should have bought the winning lottery tickets at the same time.   Buying now - at the top of the market - might not be such a good idea.

Bitcoin is very volatile.  You bought last week, you are down 20% today.  Maybe it will go up.  Or maybe governments will crack down on it - its only real use is by people demanding ransoms, or dealing drugs, guns, or children.   Our financial system cracked down on offshore banking and numbered Swiss bank accounts.  You don't think they won't go after Bitcoin?  And from all indications, they are starting to.

Tesla is on a high - but "Market Cap" is a myth.  Tesla may have a "market cap" higher than GM, but GM makes more cars in a month than Tesla makes in a year - perhaps far more.  The auto industry is one of thin margins and massive overcapacity.  Every automaker is getting into the electric car market - or is already there.  What happens then?   Will Tesla be worth more, or like DeHavilland, be relegated to history?  First to market is last in the marketplace.

FOMO - Fear of Missing Out is the problem.   We all think that, "Gee, maybe I better get into this before I miss out on even further gains!"  But there are two things to bear in mind:  1.  You don't have to invest in every damn thing that comes down the pike.   And this means you should expect to "miss out" on an awful lot in life - like those winning lottery tickets.   On the other hand, you won't "miss out" on losing your shirt - something the financial press rarely talks about.  2.  When something goes up rapidly in price it is "news" and gets reported.  That doesn't mean it will continue to go up.   On the other hand, an investment that shows steady and reliable gains over decades is rarely talked about, as that is not a "news" story.

And maybe that sums it up right there - stop getting investment advice from the "news" and think long and hard about these things - and let your internal compass guide you instead.  Well, at least that worked for me.