The Wrong Way to Gamble With Mr. Market

British entrepreneur Ashley Revell recently made an extremely risky bet. He sold everything he owned, took the cash to a Las Vegas casino, and bet it all on one spin of the roulette wheel. Luckily for him, his bet paid off and he doubled his money, as the ball landed in a red slot, in line with that bet.

Lucky is the key word, of course. Statistically speaking, Revell's bet was a loser, which is why the casino let him make it in the first place. After all, a typical roulette wheel has 37 or 38 slots, 16 red, 16 black, and one or two green (the "0" and perhaps the "00"). Those green slots give the house its edge and are what make "even money" bets like Revell's "put it all on red" money losers for gamblers, on average.

A better way to play
The reason roulette tables exist at all is that, over time, they make money for the casinos at the expense of the gamblers. The odds are stacked in such a way that every bet a gambler can make has an expected payout that favors the casino. Not all the bets go the casino's way, of course -- otherwise very few gamblers would actually wager their money -- but enough do so that on average, the casino wins. So if you're going to play roulette, do so as the casino, not as the gambler.

That might seem rather flippant, until you realize that many casinos are actually owned by publicly traded companies. The right way to profit from a roulette wheel just might be to own the stock of a casino that offers them. That way, as the gamblers on average spin away their savings, you as an investor could see some of the casino's take, in the form of dividends or stock price appreciation.

Of course, that -- like any investment -- has risks associated with it, too. Donald Trump's casinos have gone bankrupt at least three times, and more recently Station Casinos suffered through a bankruptcy as well, only emerging last year. Las Vegas Sands (NYSE: LVS  ) was itself at risk for one not that long ago, and MGM Resorts (NYSE: MGM  ) nearly bankrupted itself with its aggressive Vegas CityCenter expansion. Indeed, Caesar's Entertainment (NYSE: CZR  ) is itself on bankruptcy watch right now.

That even the casinos have trouble sustainably making money -- and they're in the business of stacking odds in their favor -- says something important about investing. What it says is that you're taking a risk every time you put your money in the market, no matter how much of a sure thing you think you have.

Run your own investing roulette wheel
As a result, you absolutely need to consider diversification as part of your investing strategy. Think of it, as Benjamin Graham -- the father of value investing and the man who taught the concept to Warren Buffett -- did, as a way to turn the stock market into your own roulette wheel.

Sure, any individual stock can still go to $0. With a smart diversification plan in place, however, even if one of the companies you own happens to become worthless, your overall portfolio can still survive or even thrive. And, at the end of the day, isn't that what really counts? Much like a roulette wheel in a casino, not every spin goes in the house's favor, but over time, the odds are stacked so that the house tends to win.

Here's how it works in investing: Say you own an equal position in each of 20 stocks in different and unrelated lines of business, each purchased based on an expected long-run 10% annual return. If 19 of those stocks perform as expected, but one becomes absolutely worthless, then at the end of the year, you still wind up with more than you had when you started -- about 4.5% more, in fact.

Yes, you would have been better off had you not bought that 20th pick, but think about the flip side. What would have happened had that now-worthless company been your only investment? Rather than still making money on the other 19, you would have been left with absolutely nothing. Just like in a casino, not every spin will work out for the house, but with enough spins, the house wins.

As an investor, you have the choice: Be the gambler and hope for the spin to go your way, or be the casino and be virtually assured that over time, it will. Proper diversification is the tool that lets you go from being the gambler that might get lucky to being the casino that almost definitely will.

At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On April 16, 2012, at 12:25 PM, cp757 wrote:

    Las Vegas Sands has a market cap that's bigger than all the other casinos combined and that's big but why ? Apple has 60,400 full time employees, Boeing has 171,700 employees, Microsoft has 90,000 employees and Las Vegas Sands has 40,000 employees ( last count but its higher now ). Of those 40,000, Marina Bay Sands in Singapore has 10,000 employees for 2,561-room's and the casino. Marina Bay Sands is the biggest home run Adelson has made. Its all about Growth and this is how they will continue to get it.

    When Sheldon Adelson was asked about Spain he said "We are looking at 12 integrated resorts, 3,000 rooms each. A mini Las Vegas, about half the size of the Las Vegas strip in Spain for the European market," EuroVegas will have 36,000 rooms and 12 casinos .Based on that information you would need 140,570 workers if the Marina Bay Sands was the model you used . The Venetian Macao is the largest in the world and has a staff of approximately 12,000 on site. The number of paid employees in Macao's gaming sector reached 50,198 at the end of 2011 and the total number of employees for Las Vegas Sands is 40,000 so the number of employee's needed for operating EuroVegas is hard to pin down.The Marina Bay Sands has three towers each with 854 rooms that stand 626 ft in the air. To have 36,000 rooms you would need 42 towers like the Marina Bay Sands instead of three.

    If you take the lake in front of the Bellagio and put it on the property Spain is giving to Adelson for free to do the deal, you could put 250 of those lakes on this location.You can put two Central Parks with 300 acres left over on the location. Las Vegas Sands is going to be a much bigger company in the next three years.This last change in the wording from Adelson led's me to think its all going to be built by Las Vegas Sands over the 10 years but opened sooner. I see no problem funding the project at 3 billion a year. Las Vegas Sands is also a real estate developer and sells off non core assets to make money. With the sale of the malls and condos in Singapore and Macau for 20 billion or more the funding will not be a problem. In three years he would spend 9 billion on the project and could start a staggered opening. He would have 9,000 rooms, three casinos and three golf courses by 2015 or 2016. This deal in Spain and the deal in Manila by another casino are the only new projects in the world that will be going that I can see. As Brody said in JAWS "You're gonna need a bigger boat".

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