Wednesday, April 11, 2007

WALK INTO ANY casino and you'll see an army of people pumping dollars into
slot machines full well knowing they're going to lose. We feed slot machines
because they're fun; even I have lost a few dollars to the slots at Las
Vegas' McCarran Airport, which is notorious for having the worst odds in
town. Of course, we don't gamble for the money. The roll of a roulette wheel
is exciting, and for a few brief moments, we revel in the adrenaline rush of
a fantasy payoff. Gambling isn't investing...it's entertainment. The primary
difference between the gambler and investor is that the gambler does not
provide an economic function beyond his own enjoyment. Keno is a cheap
thrill, but when you buy a stock, even for a few hours' time, you are
providing a vital economic function by supplying liquidity to the
marketplace. If you bought, someone else sold. Capital is allocated,
reallocated, and the market - and thus society - is more productive and
efficient. There's also a legitimate transfer of ownership. Buy one share of
McDonald's (MCD: 46.52, +0.74, +1.6%), and you indeed become Grimace's boss.
You can vote your proxy, attend the annual meeting and pester the investor
relations department to your heart's content. Of course, with 1.2 billion
shares outstanding, don't expect one share entitles you to march down to
Ronald's office and demand a meeting with Mayor McCheese. Regardless, an
economic function is served. As we've often pointed out, the world depends
on the profit-seeking speculator looking for nothing else than to make a
buck. Free and vibrant markets are the best indication of a just and healthy
society. Even "bad" bets have economic merit, such as the subprime mortgages
that have collapsed in value and are now under increasing scrutiny by
suspicious government regulators. No matter how foolish or lax the lending
terms look in hindsight, they provided huge economic value. Subprime loans
allowed literally millions of people who otherwise would have never gotten a
loan to buy homes. Yes, the investors (gamblers?) took a risk by buying the
risky paper. But money was loaned, and homes did get built and occupied. The
same could be said about Pets.com, Kozmo or any other bubble-era flop.
Billions were lost, but they were invested in something, not just
transferred from one party to another based on the throw of the dice. So the
investor takes a risk...but the gambler invents it. "Playing" the slots is
not akin to "playing" the stock market. There is no skill involved in
picking a random number. There is no technique in pulling the handle on a
one-armed bandit. Even in table games like blackjack, "perfect" play still
puts the odds of success on the house's side.