I know a nice couple that takes an annual trip to Las Vegas. You may have heard of the place... it's the city whose skyline is littered with buildings owned by MGM Mirage
Folks always say that every road in a Las Vegas hotel leads through the casino, but this is actually a big understatement. You have to walk through three miles of auditoriums and corridors lined with various slot machines and roulette wheels to get to the nearest hotel restaurant -- a restaurant at which our hosts had to make a reservation a month beforehand, and that cost $375 for a four-person meal. My steak was quite lovely, though. Don't ask what you have to go through to reach a restroom.
But what I found particularly amazing was the extent to which the casinos go to separate you from your money. They've thought of everything -- every detail is designed to lure you into opening your wallet.
The hotel cable service basically consists of five channels, and the hotel broadcasts three of them (so they can tell you about all the ways you can spend money in the hotel besides ordering movies on the television). It's kind of like the days before cable TV when you could only choose from the local ABC, NBC, and CBS stations (maybe you could get that UHF station if you held on to the antenna while you were watching). The casinos do this, of course, because they want you downstairs gambling instead of sitting on your double-watermelon watching Seinfeld reruns.
It's also worth noting that, even when we were at some higher-limit tables, we had to start playing this little game called "tackle the waitress" if we wanted to keep from dying of dehydration. This is true even if you just wanted a Coca-Cola
The big winner
My biggest eye-opener during our trip was my discovery that there are two kinds of gamblers in Las Vegas: Those that lose and tell you they lose, and those that lose and tell you they win. Fortunately, for this case study, the nice couple that we took our trip with consisted of one of each.
My friend -- let's call him "Jack" -- is the first type. Jack reads all of the gambling books and is very well versed on the odds of the various table games. He also loses fairly consistently. Jack, however, is very up-front about losing, and simply considers it an "entertainment cost."
On the other hand, we have Jack's wife -- let's call her "Ace." Whenever we compared notes after a brief gambling stint, Ace would say things like "I won $40" or "I won $60" or even "I only won $120 this time." After several days of this, I began to think that Ace was blessed with the best luck I had ever seen, and I was very happy to see someone beating the odds.
But then I began to notice that whenever Ace was sitting close to me, she didn't seem to do nearly as well as she typically reported. At first, I figured Ace's good fortune was being "shorted out" by the circle of bad luck floating around me. However, before long I considered another possibility, and I began to watch Ace's activity more closely.
It turned out that Ace was only partly right when she said, "I won X amount of money," because she wasn't really subtracting the money that she had to spend in order to win X. For instance, I watched Ace put $40 into a slot machine. She "played" that machine for about 15 minutes, and was close to walking away $40 lighter, but then the machine hit some type of winning combination and she ended up pulling $60 out of the slot.
So, Ace won $20 right? Well, you'd think so, but not by Ace's math. Ace consistently remembered only one of two things: either what the machine paid out, or what the last big winning combination had paid her. In this case, she just remembered the former, and according to her calculations, she won $60.
During the rest of the week, I met a lot more folks who were very much like Ace. Several others I spoke with tended to be more like Jack, hoping to win, but not really expecting to because they knew the odds of the game.
Doing what I do, I began to ask these people about their portfolios and the types of companies they invested in. Interestingly, the Aces of the world tend not to be very savvy with their finances. These were the people who generally had the most trouble allocating their money and sticking with a budget. They were also much more likely to discuss having large amounts of debt, particularly the credit card variety.
Those Aces who did invest in stocks seemed to have a warped sense of the risk they were taking, or they just didn't have a clue about what they were invested in. Many had over-concentrated portfolios that lacked any real diversity. Some said that most of their money was in one stock. The most recurring factor, however, was that nearly all of them felt that they had to take big risks in the investment world in order to beat the market, just like they did in the gambling world. They'd say, "The big gains are in biotech or nanotech or mumbojumbotech."
Much like their reports of their winnings, this is largely not true.
The best bet
BusinessWeek put together an interesting study which demonstrated that investors in an old, boring utility index actually outperformed investors in the tech-laden Nasdaq from 1970 to 2000. All those hot-seated tech investors took 90% more risk, and yet received less return than owners of the staid, dividend-paying utility stocks.
When I shared this little statistic with the Aces, they were consistently shocked by it. "But boring utility stocks -- dividend-paying stocks -- aren't supposed to beat the market. They're supposed to be for retirees who are only looking for preservation of capital."
Well, not exactly. Dividend payers actually outperform non-dividend-paying companies over time. They've done so for more than 70 years. Don't think you'll be investing for 70 years? You could be wrong there, but fear not, because dividend payers have beaten non-payers over the last 30 years, too.
The Foolish bottom line
The best thing you can do as an investor, or a gambler, is to know the odds of the game you're playing -- because not knowing them will cost you.
Indeed, the only way to truly win in Vegas may be to not play at all. But, if you're going there to be entertained and enjoy the decadence, have a good time. In any event, be honest with yourself, set your expectations accordingly, and remember that you don't necessarily have to bet big to win big.
If you're looking to build a portfolio around dividend-paying stocks, look no further than Motley Fool Income Investor , authored by Mathew Emmert. He recommends two dividend-paying stocks, plus other income-investing recommendations, each month. You can take a free trial with no strings attached.
Mathew Emmert never could find the bathroom in the casino and was tossed from the hotel when he asked if they had a "kids table" in the high-rollers section. He owns shares of PepsiCo.