Do You Want to Own the Casino or Visit the Casino?
I want to own the casino.
I know that against the best players I will win about 50.5% of all hands and against the masses I will win 52% of the time. If I’m playing every single hand in the building 24/7/365, I’m going to make a lot of money. I want to own the casino.
If I’m visiting the casino for a weekend with my friends, I must get a little lucky and know when to walk away if I want to leave with money in my pocket. Good luck with that!
The stock market has very similar odds in a daily timeframe. It is commonly accepted that the stock market is up about 53% of the time and down about 47% of the time.
It is really tempting in this current environment to think that you can predict tomorrow’s market movements based on what you are hearing in a press conference or reading on the internet. During volatile times it is much more difficult to get these market movements correct. And these market movements are larger than usual which can magnify your losses or cause you to miss out on a portion of the rebound.
The casino analogy is perfect for day-trading versus investing for the long-term. Even if you are not a regular day-trader but are attempting to avoid large down days and only catch large up days during the coronavirus crisis, you are setting yourself up for disappointing results and account balances.
If you want more than just talk and crave hard data, the graph below should boggle your mind.
Missing out on the 10 best days over a 40-year time frame cost you half of your gains! HALF!!!
If that’s not convincing enough, the largest of all the up days over a 40-year time horizon come during very volatile times (think Great Recession). So, if you decide that you can forecast the recovery of the economy, and incorrectly attempt to exit and enter the trend at the wrong time, a bulk of your gains go out the window.
So, what should you do? The same thing you should always be doing. Executing mechanical, non-emotional re-balancing of your portfolio on a regular basis. Don’t guess about anything. And while your re-balance is not likely to find the exact top when selling and the exact bottom when buying, it will serve you quite well over the long-term.
Come be a casino owner with me. I like playing every hand because I know that the odds over my lifetime are in my favor and should provide me with a satisfactory result.
I also know that I will lose a few hands. I’m on a losing streak over the past month like most folks. But I’m not going to suddenly sell my casino at a low price and become an occasional patron. I will ride this streak of bad luck out as well and through playing every hand in the house, come out better on the other side.
-Some of the material about was provided by Bloomberg Historical Data-