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Fluctuations - A Personal Perspective
Originally posted on Green Chip by MathProf
Some of our financial experts, such as Karel Janecek and Kim Lee, have suggested that blackjack be treated as just another investment, and that a player’s entire investment capital be viewed as bankroll. I am in general agreement with the idea behind this approach.
Now many players are reluctant to invest heavily in their blackjack bank, because it is seen as "gambling" and too risky an investment. The fluctuations in blackjack can be huge and gut-wrenching and players can go for long time with negative income. It is also difficult to explain to family, who may be understandably skeptical of the player's ability to make money from this, and who cannot understand the negative fluctuations. Curiously, the same people often view the Stock Market as a legitimate and appropriate vehicle for investment, even when they reject blackjack as being too risky.
The events of the recent past should shatter this myth. My own experience is informative in this regard.
Over twenty years ago I completed my Ph.D. and began my full-time teaching career as an Assistant Professor. I immediately began investing in two retirement funds which are popular among American Universities: TIAA and CREF. TIAA invests in fixed-income investments, such as long-term bonds, and is almost a "riskless" investment. CREF invests in the Stock Market; I think its portfolio pretty much tracks the S&P 500. I have invested in these funds continuously for the past 20 years, putting equal amounts in both. Although I have also put additional money into other stock market investments, some of my friends have accused me of being risk-averse for having so much in the fixed income funds.
Over time, the CREF fund went far above the TIAA fund, perhaps validating their criticism. However, it was useful to see the performance of the funds side-by-side, as it gave me a clear idea of how much I was making on my "gambling" in the Stock Market. I view the difference between these two funds as the amount of money that Stock Market gamble paid. For example, if fixed incomes are giving 7%, and the market is returning 10%, then you are really getting 3% for a accepting the stock market risk.
Today I looked at the figure, and I have almost the same amount in both the CREF and TIAA funds. Today there is 7.8K more in my CREF account. This means that in 20 years on investing a non-trivial part of my income in the Stock Market, I made less than 8K in it.
Now we ought to compare this to my blackjack income. I have been able to make more than 8K at blackjack. That is, I have made more money playing a few years of blackjack, with a small part of my overall savings, then I have made in the Stock Market on a much bigger investment!
Actually, I should say what I made in the CREF fund. I have made less money in the market in that, when you look at my other investments. The last time I looked, I lost 30% of the money out into my Roth IRA, in absolute dollars. I have some investments in stock funds, and these are almost certainly down as well. Of course, by the standard I discussed above, comparing the return in the market with that available in risk-free alternatives, I am down a huge amount on these funds. By this criterion, it is almost certain that I am a lifetime loser in the Stock Market, after 20 years of consistent and relatively conservative investment.
It is almost impossible for a blackjack player to be net loser over 20 years of play.
I know what some of you are thinking, that it is not really fair to look at the market today, when it is at such a low. But this is the clearest illustration of the problem of fluctuations: there are times when your capital will be much different than what it "should" be.
We know how devastating negative fluctuations can be, but positive fluctuations also are bad. They give the players a false sense of invincibility, and can lead to over-betting and over-spending. Your SO will pressure you to spend money on all kinds of silly things. Your ex-spouse will hear about your success, and hit you up for a "loan". This is part of the cost associated with positive fluctuations.
Our society is now experiencing some of the same problems. The Market has had big positive fluctuations in the recent past, and these given many people a false sense of security. People made long-term plans based on an inflated view of how their retirement investments were doing, and the social toll inflicted by these will not be pretty.