Just Plain Crazy
By Charles A. Jaffe, Globe Staff
Decades ago, the general public considered investments in the stock market to be nothing more than gambling.
Over time, that perception changed, to where people came to realize that the stock market was a great way to build wealth.
The question is whether the public is about to go full circle, to where the stock market comes back down to the level of
common gamble again.
No, this is not another of those stories about day-trading, or people moving their money around on a whim.
It's about www.betonwallstreet.com and other new Web sites on which people can bet on the next move of the stock market.
Forget day trading. That not only has commissions to worry about, but you actually need seed money to make money.
At betonwallstreet.com, all you need is a credit card.
Armed with a credit line, you can then bet on where the Dow Jones industrial average will close today, or whether the
Federal Reserve will raise interest rates later this month, or how the next Internet initial public offering will do.
And think of the possibilities in this crazy world of Internet stocks (which most people can't buy into at their opening price).
If you wager that a stock like GoTo.com will rise 40 percent from its initial stock price during its first day of trading and the
stock goes that high, you nearly double your money.
Heck, that's better than buying the stock if ''all'' it rises is 40 percent on the first day.
But this isn't investing, it's insanity.
''This is going to be the next thing to catch on,'' says Patrick Ralls, the 25-year-old California entrepreneur who opened the
betonwallstreet.com Web site a few weeks ago. ''It's a new type of bet for people who have always been sports bettors, and
a new thing for people who follow Wall Street to think about. It combines the two genres.
''Weird mix, isn't it?''
You've got that right, Patrick.
Yet Wall Street wagering is sure to catch on. Established stock-data Web sites already are creating links to on-line casinos.
These kinds of wagers have been legal (and popular) overseas for years. And Ralls's site simply links suckers - oops,
bettors - with on-line casinos, of which there will be plenty.
With the stock market so high and few people calling for an end to the current run, Wall Street looks so easy that everyone
seems to want to cash in quick.
But if investing is going to be equated to gambling - which is exactly what happens when we shorten time frames down to
hours and days - the odds are stacked against
you.
Here's why we can say that:
In casino gambling, every game, from the slot machines to the roulette wheels, has what is known as a ''negative outcome.''
What that means, in very simplified terms, is that, on average, if you throw 1,000 quarters into a slot machine, you will end
the day with about 950 quarters in your pocket.
That difference boils down to the house's cut.
The house also gets a cut in gaming wagers. If you bet on a football game, for example, the house sets the point spread in a
way by which it should be able to make money on the game. Over time, the house is certain to make money on the games -
and you are likely to fall into the statistical average and lose at least a little of your money.
In investing, however, the normal expectation is a ''positive outcome''; specifically, the 10 percent average long-term return
on stocks. It's not guaranteed, but that gain is anticipated provided an investor sits tight in blue chips.
So when we reduce investing to gambling, we actually take a positive outcome - an anticipated return of 10 percent - and
turn it into a negative outcome, the near-certainty of gambling losses so the house can get its cut.
''People think they see something, some signal in the market, and that it gives them the knowledge necessary to profit,'' says
Donald MacGregor, senior researcher at Decision Research in Eugene, Ore.
''You might as well be betting on whether it is going to rain in Paris tomorrow. Once you take all of the long-term advantages
out of investing, rain in Paris or whether the Dow will close below 10,500 are pretty much the same thing.''
In fact, when you think about it, day-trading and short-term trading winds up coming pretty close to gambling.
The idea is to make a lot of little trades and to make money in small increments based on tiny changes in stock prices.
But once the house gets its cut of commissions (even discounted ones), you need significantly more winners than losers to
avoid another long-term negative outcome.
The people claiming to make a ton of money on short-term trades will dispute this, but there hasn't been enough time or a
significant market downturn to make studies meaningful.
Moreover, many of the same people who are using these newfangled ways to bet on Wall Street would never used the
old-fashioned methods, specifically options.
Broken down to their most simplistic form, options are pretty similar to point-spread betting.
For example, one bet on the wagering Web site involved the daily closing price of America Online stock. It was a straight
over-under play, meaning you bet whether the stock would close above or below $116 per share.
Here's how an option would work, using round numbers available last week.
You could have purchased an option to buy shares of AOL at $115 each. The option would have cost about $6.50 per share.
If, over the next two weeks, the stock price got up to $121.50 - the cost of the shares plus the option - you were in the money.
(The option cost is like giving points in a bet; you need to cover that spread to win.)
Once the price crosses $115, you likely can sell the option and recoup some or all of your cost. And if the stock moves
down, the option expires and you lose the $6.50 per share.
The house gets its cut in the form of commissions. You get the protection by making this bet through a company regulated by
the Securities and Exchange Commission (which has no interest whatsoever in the on-line casinos).
Of course, most average investors consider options too complicated and too risky. But a little side wager on the stock
market? That they can understand.
''It's like anything in investing: People who want to make easy money overnight typically are disappointed,'' says Alexander
Colby, a senior vice president at Beacon Fiduciary Advisors in Chestnut Hill. ''You don't make money by gambling and
speculating, you really just have to grind it out.''
That's hard to remember in a culture in which investing has become entertainment, and people do this stuff as much for fun as
to reach their goals. In the light of entertainment, grinding it out is no fun; betting on the Dow is a blast.
''It's an interesting choice of entertainment,'' says Jeffrey Heisler, a Boston University professor who studies behavioral
finance, ''but people need to remember that it's entertainment. It's not money management.''
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