Copy this gambling technique to improve your returns
Last November, Koray Aldemir won the World Series of Poker taking home an $8,000,000 prize. If you want to match Koray’s millionaire status, you should act like a professional gambler when making portfolio decisions. Certainly, you shouldn’t cash out your IRA and head to Vegas, but you can improve your portfolio returns by employing the professional gambler’s main tactic — play the probabilities.
You Must Be Kidding, Right?
Contrary to what most Americans believe, these high rollers are not thrill seeking daredevils who rely solely on luck to win. They are cold, calculating actuaries who focus strictly on probabilities. If their cards have a low chance of winning, they fold. They don’t throw away money hoping to get lucky. Sure, they may bluff once in a while, but even the bluffs are part of a deliberate game plan.
Value, baby, Value
If you focus on the odds when making investment decisions, then your portfolio should be filled with value stocks. Since 1927, value stocks have provided investors with an additional 4.3% return annually compared to growth stocks. This additional return is not static; it does fluctuate as growth tops value some years. And since 2009, growth has throat punched value. But, this value premium dominates over the long haul. Value trumped growth 51 of the past 80 years or 64% of the time. Those are odds a professional gambler would love to have. Even the world’s greatest investor, Warren Buffett, focuses on value stocks. Mr. Buffett waits until he finds solid companies selling below their real value. Then he knows the odds are in his favor. These companies provide Buffett with a margin of safety to mitigate the chance of large losses. A perfect example is Buffett’s purchase of Coca-Cola (NYSE: KO). When he first started buying Coca-Cola, the stock market was just recovering from the 1987 crash, and the soft drink giant was still reeling from the new Coke fiasco. Yet, Buffett believed Coca-Cola was a good bet. And, he was right. Three years after the purchase, his Coca-Cola position was worth more than Berkshire Hathaway before the Coke investment.
Value is Overdue
If you need another reason to focus on value stocks, take a look at this chart.
This compares the Wilshire Growth index to the value index. At the start of 2022, this ratio reached an all-time high with the exception of the 2000 tech bubble. Every time this ratio closed in on 1.25, value trumped growth over the ensuing years.
So if you are looking to put the odds in your favor, you may want to look at adding more value stocks to your portfolio.