JUST BUY THE HAYSTACK
In 1938 Thomas Hull was traveling along highway 91 in Nevada when his vehicle got a flat tire forcing him to the side of the road. Being only a couple of miles from Las Vegas, and in a day long before the advent of cell phones, he sent his employee on foot into town to get help. While he waited in the hot desert sun he began counting the passing cards as a way to speed time while he waited. The number grew, and grew, and grew. Hull had been searching for a place to expand his growing portfolio of hotels, and he quickly realized that the amount of traffic on the highway presented an opportunity.
By the time his employee returned in a tow truck, Hull was drenched in sweat. As legend has it, while the mechanic was tending to the flat tire Hull turned to his employee and stated “What I wouldn’t give to jump into a pool.” As they say, the rest, is history.
That spot where hull waited for help was near the modern day intersection of Las Vegas Boulevard and Sahara Avenue. It became the sight of Hull’s next resort, El Rancho Vegas. Soon after came the Flamingo, the golden Nugget, The Desert Inn, and countless more. What led to the boom in the middle of the desert? A confluence of several factors; cheap land, low taxes, and of course, legalized gambling.
Deep inside all of our brains is a complex series of circuits known as the reward system. They connect all over to different parts of your brain, but most notably, the pleasure and motivation centers. Rewarding experiences like receiving a compliment, winning a game, having sex, or achieving a goal, send little messengers out to stimulate the brain. You may know that little messenger by it’s full name; dopamine. When enough dopamine gets released throughout your brain, you experience you experience euphoria and pleasure.
Unfortunately, this chemical does not only get released when we meet our goals and accomplish tasks, it can also be forced out by various narcotics, and other behaviors. This process is the root of addiction, and it is the process that Casinos like El Rancho Vegas relied on to keep guests coming to their resorts.
While it is easy to recognize gambling in man of its forms, some are harder to spot. Craps tables, roulette wheels, and online sports betting are easy examples of gambling activities that release dopamine. Many other activities mirror gambling in the addictive properties, but come without the glitzy lights and cocktail waitresses. One of the most common forms of this type of gambling is buying stocks.
Choosing a stock, and watching it go up releases the exact same chemicals as hitting on the roulette wheel. Because of that, it is very easy to become addicted. The problem with any kind of gambling though, is you could just as easily experience the pain that comes with watching the stock you just bought drop. That’s why financial advisors often relate buying single stocks more to gambling than investing.
Economist Paul Samuelson once remarked, “Good investing should be as exciting as watching paint dry.” A diversified portfolio will be exactly that – boring. By splitting your investment into hundreds of companies rather than one, you are all but ensuring that your value will not double overnight. But you are also all but ensuring that your value will not be cut in half overnight. Splitting that investment up into small pieces is how you move away from gambling and towards investing. That diversification leads to more predictability and allows you to achieve your financial goals without having to just hope for the best.
Many people have lofty goals of getting in early on the next Amazon or buying into the new Tesla. The problem is that for every Amazon, there were at least ten others that failed. For every Tesla there were dozens of companies that never sold a single product before they went bankrupt. The only way to make sure that you buy in to the next big thing is to stop trying. John bogle, the founder of Vanguard, put it this way; “Don’t look for the needle in the haystack. Just buy the haystack.”
The idea of buying the haystack, is built on the back of a hypothesis put forth by an economist names Henry Roberts. His theory has since become widely followed in finance and is known as the efficient market hypothesis. In it’s simplest form it is this; the price of any asset, reflects all information known about the asset. What it would tell you in practical terms is this. If you think you have a great idea for an investment because of reason xyz, you need to assume that thousands of other people already know about xyz, and the price of the investment already has adjusted to reflect the information in xyz. Thus, it can be deduced that the only way one can ever “beat” the market, is to either be extremely lucky, or be doing something illegal, like insider trading.
The theory is not perfect, there are still instances of investors creating algorithms and strategies that do in fact beat the market, it is becoming stronger and stronger as the age of the internet makes information so widely available.
Nowadays one of the ways investment firms seek to beat the market is not so much about what information they have, but about how fast they can get it. Since 2008 over a billion dollars has been spent by firms laying fiber optic cabled between Chicago and New York. Their goal was simply to reduce the amount of time it took to transmit data between the futures contracts trading floor in Chicago, and the equity markets in New York. Now, to be clear, we are not talking about spending that money to cut the time from ten second to five. We are talking about cutting that time from 14.5 milliseconds, to 13 milliseconds. 1.5 milliseconds was worth billions of dollars.
What is the moral of this story? Unless you are lucky, criminal, or have billions of dollars to improve your home network, you likely will not consistently beat the market. So what do you do? If you feel lucky, go to Vegas. If you want to plan for your future, just buy the haystack.