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Is luck-based investing a fool’s gamble? Spectator Money investigates

20 April 2017

11:50 AM

20 April 2017

11:50 AM

I used to like aphorisms. Maybe a little too much. In the good old days, I sought them out on Google – their infinite wisdom reassuring validation for whatever romantic or existential mess I’d gotten myself into. Today, they hold the appeal of a ripe Époisses. Rendered hackneyed and empty by social media. Occasionally, amid the deluge of syrupy cack on my Instagram, I’ll spot a gem. If you want more luck, take more chances. You may play the Euromillions, own Premium Bonds or like me, indulge in the occasional turn of roulette. Unlike me, you probably didn’t disappear on your husband for three hours, before breakfast, inside a Monaco casino. But as we all know, you’ve got to be in it to win it.  The era of low interest rates has altered the contours of acceptable risk, but is luck-based investing ever justified or is it simply a fool’s gamble?

Winning is outrageously unlikely. In fact, you’re more likely to choke on a gerbil or be struck by lightning while being devoured by a shark in your bathtub. Yet over 70 per cent of the UK’s population regularly play the National Lottery, hoping to defy the one in 45 million odds of winning. That being said, as far as ‘investments’ go, the lottery is not as hopeless as the odds would suggest. After all, improbable things happen all the time. One family in the Midlands has, against odds of 350 billion to one, hit the jackpot three times – winning £3.25 million. The law of large numbers states that in an infinite universe, given enough opportunities, even the most unlikely event is certain to happen. To put it another way, someone always wins – the trouble is, it’s always someone else.

But even to a sober-minded pessimist there’s much to recommend playing the lottery. The absence of opportunity cost for starters. Buying a ticket does not, like normal investments, require abstinence from current consumption. Moreover, even if you lose, which you will, you are not merely playing for chance but for the joyous fantasy of it all. You’ll pay off your mortgage, quit your job and send your missus for lipo. Just £2 buys you a dreamy blueprint to a future of meaningful unemployment – fulfilling the lazy person’s ultimate dream – filthy riches with minimal effort.

If defying the odds and beating statistical truths doesn’t float your boat, then Premium Bonds may be just the ticket. Being government backed, the first thing they offer is safety – win or lose, you’ll see your money again. A maximum of £50,000 can be committed and they’re redeemable at any time. Of course, returns aren’t guaranteed and the prize fund has recently been cut, so an investor with average luck will from May expect to receive a 1.15 per cent tax-free return on their investment. While this may seem meagre, with interest rates being what they are, it’s not a great sacrifice and statistically, delightfully free from the sting of failure.

For a gamble that’s neither fun nor clever, look no further than spread betting.

It’s really just crystal-ball gazing, the idea being to predict price movements in shares, currencies and other instruments, without having to own them. Trades can be leveraged allowing one to take a much larger position with a small amount of capital – greatly amplifying not only gains but losses. Unsurprisingly, 80 per cent of spread betters regularly lose money. It is therefore little wonder that the Financial Conduct Authority has taken notice and proposed measures to protect consumers. However, my chief objection is not that it’s risky or poorly regulated. It’s simply embarrassing company – your archetypal spread better being a podgy, Ponzi-frenzied, adolescent dreaming of a garishly coloured BMW. As far as luck based investing goes, steer well clear, you’re more likely to meet Calamity Jane than Lady Luck.

Circling back to my stint at the roulette table: something no sensible financial columnist should ever admit to. I lost, dear reader. Not once, not twice, but many many times. And if that isn’t the nail in the coffin to my credibility, I went back the next day, lured by the slim whisper of fortune and eager to recoup my losses. Of course, this didn’t happen because information is the fundamental differentiator between an investment and a gamble. Prudent investments are evidence based, whereas gambles beat with hearts of pure randomness. Spinning the wheel of fortune is a great equaliser of men – John Doe or George Soros, probability favours no man. To quote someone with more sense than me, ‘good investments create wealth without any losers’ – unfortunately though, they don’t come with a free glass of champagne.

Hanushka Toni is a freelance journalist and former private client solicitor

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