David Dreman's
The Sure Thing That Nobody Plays
Imagine you are entering a deluxe, well- appointed
casino.
Off the lavish entry foyer, there are
two ample gambling wings, one hued in reds, the other in muted greens. The red
wing looks enticing, but if I may insist, let's first enter the less crowded
green rooms to watch the action.
The atmosphere is unhurried, the blackjack tables
are sparsely attended, and every player sits behind a mound of green and black
chips. You think at first you've come to the wrong place. You see the ordinary
table limits, the ordinary clothes, the ordinary games. But then how did these
ordinary people get such piles of money?
Then it comes to you. They're all winning. In fact, as you walk around the green wing, you hardly can find a losing player. You know, of course, that the average house take on table games is 5%, but as you count winning and losing hands, you realize these players are getting a better break. They seem to be gaining at a rate of 60% to 40%. You start fresh and take another count. The results are the same.
A pit boss
appears at your shoulder.
"Excuse
me," you say, "but can this be right? The odds favor the
players?"
"Yes, indeed. The odds in the green room usually run 60 to 40. It's been
that way since we opened."
"But...most of the players must go away winners."
"They sure do. At those odds, we calculate that 9,999 out of 10,000 make money. At our high-stakes tables in the back, they do even better, with winners running about 20,000 to 1. It's a good thing we get so few players, or they'd break the house."
In short , in the green wing …….
Somewhat
amazed, you thank him and shake your head. There's no time to lose, you decide,
but you'll need more than the few dollars you have in your pocket. You hatch a
plan to gather your life savings, come back to the casino, and win the bundle
you've been dreaming of.
On your way
out, you glance into the red wing. The action level is much, much higher. The
room is crowded and fairly roars with excitement. Can it be even better here,
you wonder? Curious, you go in. Players bet multiple table positions, wave
frantically for change, entreat the gods for luck. You see few green and black
chips, fewer winning players. The piles of chips in front of them are dwindling
with each hand. In fact, the odds are worse than normal. Again, you start to
count. Although the players continue to excitedly toss in their chips, the odds
appear to be maybe 60 to 40 in favor of the house. Once more, your curiosity
whetted, you walk over to a pit boss and ask her the odds at these
tables.
She tells you what you suspected. They are 60 to 40 in favor of the casino. Warming up to the subject, she chuckles and says, "This room coins gold for the casino, the chances are 9,999 in 10,000 rounds that we wind up winners." You don't have to be a genius to see that this is obviously not the place you want to be.
You go home and
get your stash. You return to the casino with your
fistful of money, excited, eager for action, all the time figuring
how you'll do even better at the game.
But then a
strange thing happens. You walk into the red wing and start to
play.
The concept shown in this parable is ... RISK! In investing, like gambling, risks are always there. All of us, no matter what we do, we'd like a challenge. That's where that "thrill"comes in. For example, would you be interested in a class where you're the only one who excels No. You'd rather risk your class standing in a class full of competent students. Risks/ challenges pushes us to do our best. BUT! We must also remember, that in investing, no matter what kind, we should always think of and plan what were going to do. Risks are fun but we also expect better results.
