Friday, February 7, 2014

What You Can Learn From Blackjack

Anyone who plays Blackjack at a casino understand that there are certain rules, that if you follow them, will get the odds close to 50/50 between you and the casino.  If you don't follow the rules then the odds tilt in the casino's favor.  Following or not following the rules doesn't guarantee that you will win or lose but it gives you the highest odds of winning, which will play out over the long term.

There is a more advanced move in Blackjack called surrender.  If you choose to surrender you lose half of your bet.  You would only use this move in a situation where the odds were strong that you will lose your entire bet.  Only losing half preserves your money for later when hands come up where the odds are in your favor.  So in effect, when you surrender,  you are guaranteed to lose half of your bet with no chance of losing your entire bet.  Will this move always work out?  Of course not.  But again the idea is to put the odds in your favor long term and preserve your capital for better opportunities.

I recently got an email from someone we work with who has a bunch of very risky mutual funds that have surrender charges.  He wanted to know whether it made sense to surrender these funds and pay a known surrender charge or hold them and hope the market came back.  I have no idea where the market will go from here but as I write this we are in a downtrend.  The odds are that it will go lower and that these funds will lose much more than the surrender charge.  Could he sell the funds, pay the surrender charges, and then the funds appreciate?  Of course they could.  Does that make surrendering them the wrong decision?  No, because it puts the odds of success in your favor and over the long term, if you do that, you will be much better off.