The public often seem to feel that investment strategies (and shares in particular) are somewhat akin to a gambling den. In fact that is a long way from the truth as the following comparison with horse racing attempts to demonstrate.
The regular losers in horse racing tend to be the everyday punters who spend time looking over form guides, listening to tipsters, following weather forecasts and so on. On the other hand the TAB consistently wins. They spend less time worrying about form guides, tips or the weather. They rely more on getting the odds right.
The TAB are in fact very good managers of risk. They have no divine information on which horse is likely to win a particular race. And their earnings from race to race and meeting to meeting can be highly variable (including sometimes the possibility of a loss). But by adopting a sound strategy based on researching the odds, the TAB can target their long-term earnings with reasonable accuracy.
While the punter focuses on trying to pick the winning horse in a few races, the TAB spread their bets. To ensure this spread, they offer better odds on less fancied horses so that the punters don't just back the favourite. Effectively the TAB bet on every horse in every race. The TAB try to "square" their books to ensure that regardless of which horse wins a particular race, they at least break even.
In the investment world holding a “portfolio” which is diversified across most of the quality securities in the market, and across different asset classes and different countries achieves a similar result.
Individual investments will occasionally collapse. But a well spread portfolio locks in for the investor the benefits of overall economic growth, even though the investor can't be sure at the outset which individual investments will do the best and which will do the worst.
For investors “playing the odds” means understanding what are the long term risk and return characteristics of the different investment markets. Investors with longer term objectives will orientate their portfolios towards a well-diversified portfolio and have the discipline to hold this portfolio, notwithstanding inevitable short-term fluctuations.
The TAB are patient. Their aim is to come out ahead and make a good living in the long term.
They do this, not by avoiding risk, but by having a strategy to manage it. By managing the odds they can be almost certain of achieving their longer term objectives. The punter is a gambler, the TAB is the strategist, or if you like, an informed investor.
Far too many people adopt a speculative, rather than a strategic approach towards financial markets. As a result, they can be disappointed and regard the markets as "too risky".
True investors understand that success comes from managing risk effectively and in having ongoing discipline, focusing on more certain results in the longer term.
