"The stock market is like a casino, but without the free drinks."
-- Peter Richiutti, Marketplace radio commentator
It's a fun quip, sure, but those of us who actually do invest in the stock market know that cliches comparing investing and gambling are flat-out wrong.
Over the long term, casinos deliver, on average, a negative rate of return. On the other hand, over the long term, the stock market delivers a return of 10% annually, on average. In some cases, that negative rate of return is increasing. In Wynn Resorts' (NASDAQ:WYNN) most recent annual report, the company reported that it was able to increase the house's winning percentage in both table games and slots.
While the slot machines make the biggest noise (literally), it's the table games that take in the lion's share of revenue at the major casinos. For its most recent quarter, Las Vegas Sands (NYSE:LVS) reported that more than 60% of its gaming revenue at The Venetian in Las Vegas came from table games.
Still, there's more in common than I'd thought
Despite my limited gambling experience, last month I drove to Atlantic City for a night of cards and camaraderie with three of my Foolish colleagues. After a great meal and a few beverages, our good time came to an abrupt halt when we found ourselves at a blackjack table at the Tropicana, being dealt cards by none other than Satan herself.
OK, so she wasn't actually Satan. She was probably just one of Satan's regional managers. The point is, she wiped us out. My first round of cash was gone in less than 30 minutes. The other guys hung in for awhile, but it wasn't long before we exited the casino and headed down the boardwalk in search of better luck.
"Invest in Brian"
We moved to the Hilton, and I watched my colleagues Brian Richards (Fool editor) and Bill Barker (writer/analyst for Motley Fool Hidden Gems) play cards. When I was finally ready to rejoin the fray, I asked Bill whether he had any advice.
"Invest in Brian," he said.
When my blank stare indicated that I wasn't catching on (remember my limited experience at the gambling tables), Bill explained: "Look, Brian's the best player at the table. If you're not comfortable going it alone, just start adding a chip to whatever he's betting, and if he wins, you win, too."
And that's when the light bulb went off. I was no longer gambling; I was investing.
The moral to the story
I was now investing in a business run by someone who was more experienced and knew more about being successful than I did. I was investing in a business by someone I had complete faith and trust in.
And, perhaps most importantly, I was investing in a business run by someone whose interests were completely aligned with my own.
By investing in Brian (and later, in Bill), I wasn't just changing my luck; I was changing my strategy. Not surprisingly, that's precisely the moment I started to win my money back.
Who's running your company?
At The Motley Fool, we love to find companies run by people whose interests are aligned with those of the shareholders. Historically, we know that those businesses have rewarded shareholders tremendously. Think of two of the market's biggest success stories.
When Sam Walton took Wal-Mart (NYSE:WMT) public in 1970, the IPO raised $5 million and Walton retained 61% of the company. After a few decades under Walton's dedicated stewardship, Wal-Mart became the largest retailer in the world.
When Bill Gates took Microsoft (NASDAQ:MSFT) public in 1986, he owned 45% of the company. Over the past 31 years as CEO and, today, as chairman, Gates has overseen returns of greater than 30,000%.
CEO and co-founder Mark Vadon owns 8% of online jeweler Blue Nile (NASDAQ:NILE), a stock that's up nearly 150% over the past two years. Chairman and CEO Selim Bassoul and his team own 7% of industrial oven maker Middleby (NASDAQ:MIDD), a stock that's crushed the market's performance over the past five years.
The bottom line
Finding dedicated insiders whose interests are aligned with yours is one step toward beating the market with small caps.
It's the tack we follow at Hidden Gems, and the results speak for themselves. Since the service began in 2003, recommended stocks (including Blue Nile and Middleby) have gained an average of 52%, versus 21% for the same amount invested in the S&P 500. If this approach interests you, or if you'd like to see our picks and research, you can sample Hidden Gems for free with a 30-day trial.
Chris Hill knows that what happens on the drive to and from Atlantic City stays on the drive to and from Atlantic City. Chris owns shares of Microsoft. Wal-Mart and Microsoft are Inside Value recommendations. Blue Nile is also a Rule Breakers pick. The Motley Fool's disclosure policy can beat up your disclosure policy.
