Monday, November 17, 2008

Gambling or investing?

A reader once request for some gambling tip some time it is!

I. Gambling: (i) It is zero-sum which means "positive returns to the middleman (i.e. casino) translate to negative returns to the player". For example, the return to "4-D, Small" is - 42.0 per cent. It means that in the long-run, you will average a loss of 42 per cent per wager. It also means that for every $100 that is bet, Singapore Pools keeps $42. It pays out $58 to players in winnings.

(ii) The column “How long to lose it all” tells how many hours, tickets or races it takes to lose 95 per cent of your initial capital at a normal rate of play. In the example for 4-D, Small, it is "6 tickets". It means that on average, a person will lose 95 per cent of their initial capital after playing 6 tickets.

(iii) The odds for the games assume perfect play such as knowing when to take another card in blackjack. For horse-racing, it assumes average skills.

II. Derivatives: (i) Options, futures, warrants and structured warrants are the most common derivatives.

(ii) Derivatives are contracts and not assets. Because the contracts have limited lives, they are zero sum among all market participants. At any point in time, gains equal losses among all traders, before costs. Hence the name zero-sum. After costs, the sum of all trader returns is negative. This makes derivatives less like investing and more like gambling, which is also negative-sum.

(iii) It is not possible to estimate the size of the negative returns or "How long to lose it all" for two reasons: (a) trading costs (the numerator) vary for each type of derivative and (b) margin requirements (the denominator) vary from broker to broker.

III. Investing: (i) ILPs are “investment-linked products”. These are similar to unit trusts and sold by insurance companies. Both are called "funds". ETF’s are exchange-traded funds. They differ from other funds because they trade like stocks. In Singapore, they have much lower expenses than other funds.

(ii) Investment returns assume a diversified portfolio. Returns to stocks and small stock are from US data since 1926. Small stocks are defined as having a market capitalisation (price x no. of shares) under US$200 million.

(iii) Expected returns for funds (Unit Trusts and ILPs) are only 4.2 %. It is for various reasons -- (more than just high expense ratios).

* This is taken from:


Anonymous said...

why mahjong is not on the list :)


Nobody really knows the odds.