Gambling with cards or dice or stock is all one thing.
It’s getting money without giving an equivalent for it.
-Henry Ward Beecher
What can we learn by looking at a carnival, a casino, and the stock market as simple-closed systems?
For our purposes, at its most basic economic level, a carnival has as its economic input the sum total of money that we marks spend on buying tickets. We will call this amount, “SALES.”
We will call the sum of money spent by the carnys on the giant stuffed animals and glow-in-the-dark necklaces that we marks win and get to take home from the carnival, “WINNINGS.”
We will refer to as, “OVERHEAD,” the total amount of money the carnival pays for all other expenses, such as roller-coaster loan payments, payroll for the carnys, clowns, and sideshow acts, electricity, gasoline, reptile feed, bribes to government officials, and snowcone syrup.
SALES – (WINNINGS+OVERHEAD) = PROFIT (or LOSS)
Nothing odd about that. We go to the carnival to have fun. It is entertainment, not an investment. We don’t expect a return on our money.
What is the con? The con is that the milk bottles are made of lead and much harder to knock over than you imagine, and the carny’s basketball hoop is half size.
Is it any different for a casino, if we leave out the hospitality aspects of the business for simplicity’s sake?
SALES is the total sum of money which we marks spend on buying chips. WINNINGS is the sum of money that we marks get to take home from the casino when we cash in our chips.
We will refer to as, “OVERHEAD,” the total amount of money the casino pays for all other expenses, such as construction loan payments, payroll for the dealers, electricity, white tiger feed, bribes to government officials, and slot machine repairs.
SALES – (WINNINGS+OVERHEAD) = PROFIT (or LOSS)
Nothing odd about that. We go to the casino to have fun. It is entertainment, not an investment. We don’t expect a return on our gambling, except maybe if you are a gambling addict. We understand that the house always wins in the long run. We understand that someone is paying for those giant water fountains in the desert, and Steve Wynn’s art collection. We understand that the someone is us, because the odds are always against us.
What is the con? The con is hope.
Is it any different for the stock market?
SALES is the total sum of money which we marks spend on buying stocks from the broker/dealers. WINNINGS is the sum of money that we marks get to keep when we sell our stocks to the broker/dealers.
We will refer to as, “OVERHEAD,” The total amount of money the broker/dealers pay for all other expenses, such as interest payments on debt, payroll for the licensed broker/dealers, traders, analysts, and software developers, electricity, coffee, campaign contributions to government officials, CNBC advertising, and exchange fees.
SALES – (WINNINGS+OVERHEAD) = PROFIT (or LOSS)
There is something odd about that. We don’t invest in the stock market to have fun. Or do we? It is an investment, not entertainment. Or is it? We expect a return on our investing. We fail to understand that the house always wins in the long run. We fail to understand that someone is paying for those golden toilets on Wall Street, and Steven Cohen’s art collection. We fail to understand that the someone is us, because the odds are always against us as individual investors.
What is the con? The con is that economic growth is both good and real. It is most often neither The con is nominal returns versus real returns.
What keeps the con going? Apart from our greed? Money printing.
Please, understand that if the amount of money in a closed system doubles, the value of each monetary unit halves, and the price of everything, including stocks, increases 100%.
I realize this is all an over simplification. That doesn’t mean it isn’t true, it is, and that we cannot learn something from it.
We can.
TANSTAAFL!
h_h
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