plj8624
07-10-2004, 10:13 PM
I am an investor and poker player and I wanted to share a couple thoughts on the relationship between investing and gambling.
First I want to relay a story about an opportunity that came at the wrong time for me to take advantage of it. It is late 2002/early 2003 and I hear about a preferred stock called American Airlines Public Interest notes (NYSE: AAR). It is one of those $25 par value preferred stocks that pays a fixed dividend that the company is obligated to pay and can only get out of if they are bankrupt. At the time, American Airlines was having a lot of difficulty and it was looking doubtful as to whether they could stave off bankruptcy. I am a conservative investor and it looked too risky for me at the time. I wish I had had an understanding of pot odds... At its low point of $2 a share, AAR was offering investors an immediate 5:1 return if they could avoid bankruptcy (i.e. it would shoot up to $10 just if they survived). Odds of them surviving were not totally clear but were probably even money in the best case and at worst about 2:1 or 3:1 against. It would have been a good bet. Furthermore, if they do survive, the longer term implied odds were as high as 12:1 or 15:1. As it turns out, AAR now floats around $18 to $20 a share which meant a 9:1 or 10:1 return on investment. This is not merely results-oriented thinking. It was a bet with positive expectation that I passed on that worked out. Now, I wouldn't go betting my whole investment bankroll on such a risky proposition, but I should have risked perhaps a percent or two.
The next point I want to bring up has to do with options. Options are, on their face, bets about prices within a certain time frame. Most of them are sucker bets, but occasionally you might find good bets with +EV. Another interesting way to play options is through selling covered calls. This is when you sell call options on stock that you already own, hoping it doesn't reach the strike price in time and that you get to pocket the option premium. This too can be looked at in terms of odds and EV.
Basically, investing is a lot like gambling although usually the swings aren't as dramatic.
Any thoughts?
First I want to relay a story about an opportunity that came at the wrong time for me to take advantage of it. It is late 2002/early 2003 and I hear about a preferred stock called American Airlines Public Interest notes (NYSE: AAR). It is one of those $25 par value preferred stocks that pays a fixed dividend that the company is obligated to pay and can only get out of if they are bankrupt. At the time, American Airlines was having a lot of difficulty and it was looking doubtful as to whether they could stave off bankruptcy. I am a conservative investor and it looked too risky for me at the time. I wish I had had an understanding of pot odds... At its low point of $2 a share, AAR was offering investors an immediate 5:1 return if they could avoid bankruptcy (i.e. it would shoot up to $10 just if they survived). Odds of them surviving were not totally clear but were probably even money in the best case and at worst about 2:1 or 3:1 against. It would have been a good bet. Furthermore, if they do survive, the longer term implied odds were as high as 12:1 or 15:1. As it turns out, AAR now floats around $18 to $20 a share which meant a 9:1 or 10:1 return on investment. This is not merely results-oriented thinking. It was a bet with positive expectation that I passed on that worked out. Now, I wouldn't go betting my whole investment bankroll on such a risky proposition, but I should have risked perhaps a percent or two.
The next point I want to bring up has to do with options. Options are, on their face, bets about prices within a certain time frame. Most of them are sucker bets, but occasionally you might find good bets with +EV. Another interesting way to play options is through selling covered calls. This is when you sell call options on stock that you already own, hoping it doesn't reach the strike price in time and that you get to pocket the option premium. This too can be looked at in terms of odds and EV.
Basically, investing is a lot like gambling although usually the swings aren't as dramatic.
Any thoughts?