Vegas Odds, The Stock Market and Annuities
The first time I ever went to Las Vegas was for a conference just before I got my insurance license in 2003. Walking into the hotel/casino I saw a sign that said, “this casino pays out 97% of the time!!!”. That sounded pretty exciting to me and without much money in my pocket it made me feel as though I was about to become rich.
It took a long time before I understood what that meant and it was my first lesson in cutting money in half. We played blackjack the first night and I kept thinking about those odds like ultimate wealth was a forgone conclusion. Even a kid like me, fresh out of statistics class, would be in awe with all the flashing lights and ringing bells in Las Vegas.
Almost nothing in life is guaranteed and there’s a big difference between making money and preserving money. Both of those things are at play when you sit down at a poker table or slot machine and each person has a different objective. Some like to gamble and others like to play. Gamblers are looking for the big hit and players just want to see the numbers fall. I am somewhere in the middle of those two but when it comes to someone else’s money, I don’t do either.
Gambling is a big thing in Montana. State laws being what they are, nearly every gas station and cafe has a casino with video poker and keno machines. As soon as I was 18, I started habitually throwing five bucks into a machine when I stopped for gas. It really was the earliest time I began to learn how money works. Sometimes I doubled it and sometimes I lost it all, but I never paid much attention to my gains and losses over the years. Even though I didn’t have much money it was only five dollars.
I never attached an interest rate to it because it wasn’t a whole lot of money. But, casinos in Vegas don’t play around and anything they advertise is very accurate, even if you don’t know what it means. My first trip clued me in far more than the handful of times I threw a few dollars in a machine back home. I may not have realized it right away but I have since come to know exactly how to explain it. 97% payout is a guaranteed loss.
It simply means that for every dollar you put in, you only get back 97 cents on average. Why else would they have such a fantastic show? Some beat the average and win money and others lose money. Over thousands of examples, the casino knows they will make three cents for every dollar spent on a game. That is why they try so hard to convince you it’s a good deal. It’s ok if you enjoy the game and only a problem if a person thinks they can make money doing it. The casino always wins.
A good example is me putting $100 into a poker machine and betting $5 per hand. Once I bet the five dollars, that money is gone. Only if I win the smallest hand do I get my five dollars back. That is considered a 100% return of my money. If I lose then my five dollars is gone, representing a 100% loss. Several winning hands pay more so that is why lots of people play. No one puts a hundred dollars into a machine, bets five dollars, loses it and then cashes out for $95. People are there to win and they walk away if they don’t. This is where it gets interesting to me.
Gamblers know they have to draw down a long way in order to make money. There are times when they have to absorb losses as a way to buy time before the big win. I have gambled in my life, with both casinos and my career. At times either was careless or calculated and the education was the biggest payoff. It’s not much different than the stock market. The average person doesn’t know any more about equities than they do about bright lights and bells in Las Vegas. Both are designed for the bigger players to win.
I used to spend an occasional Saturday afternoon playing poker machines with a long-time friend of mine. We were both gambling and looking for the biggest payout, although on a much smaller scale than you would find in Nevada. He had an interesting strategy that paid off pretty well for him. He’d put $20 into a machine and if it doubled he’d cash it out. He’d put the receipt in his pocket and another twenty in the machine.
Every time he made a little money he would cash it in and put the ticket in his pocket. He wouldn’t redeem the tickets until we left the casino. It seemed like a lot of work to me but I realize now that he always walked out with money. He put the annuity in his pocket so that the Vegas odds and variability of returns cause a lot less damage than otherwise.
Take some chips off the table if you want to know that money is not ever going away. Odds are you might lose it if you don’t.
Have a great weekend!