Let me explain this approach to you. In many ways, investing in the
stock market, the commodities markets, or buying and selling options is
very similar to playing the game of Roulette. Both have certain
probabilities to winning and losing.
In statistics, we consider the commodities market, as well as the game
of Roulette to be zero-sum games. That means the amount of money you
win is equal to the amount I lose. That way, the sum of all wins and
losses is zero. If you bet red and you win, the house loses the exact
amount equal to your wager. If you bet black and the Roulette decision
is red, you lose your wager. In the end, it is a zero-sum.
The field of statistics grew tremendously during and after World War
II. The United States and the United Kingdom were the dominant force in
advancing this field. After the war, most of the newfound principles
were applied to the business world. We find statistics in management,
stock market forecasting, economic planning, and even sociology.
Zero-sum means that whenever you win, the house loses -- there cannot
be two winners. Now you may asked, "But what about the house edge?
Doesn't the house always win in the long-run? How can you beat Roulette
consistently?"
Well, all good questions. In fact, these are the same questions my
partner and I asked ourselves as well. Whenever we compare playing
Roulette to investing in the stock market, we find that your brokerage
fees are like the house advantage. Without paying your broker a
commission, you are not allowed to play the stock market game. On that
same token you are not allowed to play the Roulette game, if you are
unwilling to pay the house its commission, i.e. the house edge.
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