Succeeding in the new investment environment

This article was first published in 2002. The investment environment of 2009 has made it timely again, though.

Scarcely a day passes lately without some revelation which shakes investor confidence. In fact, investor confidence has been shaken more often lately than a broken gumball machine. So it's scarcely surprising that more and more people are asking me what types of investment they should be making in the new investment environment.

The keys to investing these days are to make investments in a field where costs, risk, and payoffs are clearly defined and in which regulatory authorities promptly apprehend and severely punish miscreants whose actions threaten the integrity of the market. In other words, you want to be playing the ponies.

At the race track payoffs are clearly defined – if the horse you like is posted at odds of 5-2 you know that should it win you will receive between $7.00 and $7.90 for each $2 you bet. That's a possible 295% return over a period which may be as short as fifty-odd seconds. When was the last time you got a hot stock tip promising that sort of payoff?

The superiority of playing the ponies to other forms of investment may be easily demonstrated. For example, the return on lottery tickets is typically a loss of between 45% to 55%. That is, the investors lose 45% to 55% of their investments – that's scarcely better than the stock market.

Of course, investors in the parimutuel fund market lose on the average. The difference between playing the ponies and the lottery, though, is that you can take some simple actions to increase your return on investment. Although most bettors lose, you don't have to.

The advantage of the race track to the investor is that you don't have to play every race. You can bet only those races where your chances of making a profit are highest. I, for example, am a form handicapper so I have learned to bet only claiming races. When owners know that they may be losing their horse at the end of the race, they race it to win. Consequently a horse's recent form (quality of performance) is a better predictor of its performance in the race you're betting than it is in other races where owners know the horse will be going back to their barn afterwards.

Of course, knowing which races to pass and which to bet means that you'll have to learn something about how to handicap races and that you'll have to keep records of your success with different types of bet and race. Of course, if people had learned how to handicap stocks they might have more confidence in the stock market today.

You should also follow the disciplinary activities of the racing authorities in your jurisdiction. If people are caught cheating, that is a good thing. People look down on the harness races because people are caught cheating at them, but I'd rather play a type of racing which catches cheaters than one which doesn't. Again, if people had applied that principle to the stock market they'd have more confidence in it today.

Stick to the types of bet which offer the highest return rather than the highest payoff. Triactors (aka trifectas) offer glamorous payoffs but a far lower return on investment than the humble win bet. Gee, I guess if people had followed that principle in the stock market they'd be more confident today, too. Although they wouldn't have all those dot.com stock certificates to paper the bathroom with.

Finally, follow the two great rules of gambling – don't bet money you can't afford to lose, and when you're losing money don't increase the size of your bets in an effort to catch up. If investors in stocks had followed those rules – well, you know.

Succeeding in the New Investment Environment © John FitzGerald, 2002