Tuesday, April 12, 2011

Investing or Gambling? Part 9: Is Manipulation Possible?

The Last Days of Lehman BrothersImage via Wikipedia
So now that we have: defined the differences between gambling and investing; looked at successful professionals of both disciplines; listed a subset of gambling and investing instruments; and identified the mathematical foundations of both, we are ready to ask ourselves:
Can Gambling & Investing 
Outcomes be Manipulated?

Given the recent events that have driven oil prices through the roof once again, and the exposure of the Madoff Ponzi scheme, we can quickly agree that certain investments may indeed be manipulated.  Additionally, we have all been taught the risks of gambling with regard to: horse races being fixed; people who cheat at poker; three card monte; card sharks; pool hustlers, etc.


Unless the common investor or gambler understands the outside risks that they face from their competition, they are merely sitting ducks for the professionals who specialize in certain products.

While it is beyond the scope of this article to identify all places where an market prices and game outcomes can be manipulated, we believe it is important to illustrate some of the potential schemes that are aimed at taking your money.
  • Buying Commodities. With all the turmoil in the world, the price of gold has increased dramatically. As this metal increased in value, many small Gold retailers have aggressively advertised the reasons why you should buy gold. However, most of these firms are only cashing in on the buying frenzy. They do not care if the price increases or declines. They will make a commission either way. You are the one that will lose.
  • Same is true if you buy stocks as an individual investor. For every 100 shares that you buy, someone else may be buying thousands. Most of those who buy in large quantities have much more timely information than you. Unless you can time the market right, there is a good chance that the market will turn against you. All you can do is to go along for the ride.
  • Playing casino poker. If you enjoy visiting a casino and playing at a poker table, chances are that you are playing against one or more professionals. These folks play every day and this is their living. They usually have much more money than the common visitor and can therefore influence your playing decisions. You may be lucky to win a few good hands, but in the long run, you will probably lose most of your money to these individuals.
  • Horse racing. This is a sports gambling event that you bet against others. Many of those study the past performances and understand the subtleties of individual tracks. However, your main competition is the horse owner, trainer, track workers, and rider community. These are the folks who make a living off their investment. While many of the owners may not make a profit, they will probably not lose money either. This is a small community and they keep everyone in business by taking your hard earned money when you least expect a loss.
As a small investor or gambler, you are always at the mercy of those professionals who specialize in a particular investment type, sporting, or gambling game. Always be aware that they have more money than you which can alter the payout odds or investment prices. Most of the people working against you are in business to earn their own living. As such, they are not targeting you as an individual, but rather you as a member of a class of the uninformed.
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