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A Brief Note On The Difference Between Trading And Investing

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Investing in oneself and enterprises one actively controls may be the only legitimate deployment of capital that qualifies as an investment in the traditional sense.

Since I've been discussing the stock market in general terms (Bull and Bear, etc.), it seems like a good time to briefly note the difference between trading and investing.

In general, investing is putting capital at risk for the long term, based on a trend or story that the investor believes will have a material impact on whatever financial vehicle he has chosen to invest in.
 
In general, trading is shorter-term and technical-based. A trader might buy and sell the investor's chosen financial vehicle many times, based on technical trends and indicators.
For an example, let's take a look at a natural gas-based commodity fund, UNL. United States 12 Month Natural Gas Fund (UNL):

"The United States 12 Month Natural Gas Fund® LP (UNL) is an exchange-traded security that is designed to track the price movements of natural gas. UNL issues shares that may be purchased and sold on the NYSE Arca.UNL invests primarily in listed natural gas futures contracts and other natural gas related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less."

Here is a long-term chart of UNL with an investor's buys and sells marked:
 
Here is a one-year chart of UNL with a trader's buys and sells marked:
 
The long-term investor may use technical tools to choose entry points--for example, MACD and moving-average crosses--but the investment is fundamentally based on a story about the underlying dynamics and trend changes.
 
For example, the investor in UNL may be betting on this story: either natural gas production in the U.S. will decline as fracked production falls off, or global demand for natural gas will rise even faster than production, pushing prices higher. Whatever the underlying dynamics, demand will outstrip supply and prices will move dramatically higher over time.
 
To the investor with this long-term story, the last year's price variations are essentially signal noise.
 
To the trader, the dynamics and trends of the story have no material impact on trading decisions, which are all technical: bullish and bearish crosses, moves above and below Bollinger bands, etc.
 
The choice of being an investor or trader is not either/or. Some people have both a long-term investment in a financial instrument, and another sum of money in a trading account that they use to actively buy and sell the same instrument.
 
One can find a story about the economy or stock market compelling but choose not to trade or invest capital based on the story because the stock market may be trading more on sentiment and central bank intervention than on fundamentals. I covered this in Here's What I Recommend in the Stock Market: Zip, Zero, Nada (June 20, 2014).
 
In other words, it's an open question whether a market that is heavily dependent on perception management and unprecedented intervention by central banks,opaque dark pools/shadow banking and digital trading robots run by major players, and gamed corporate profit/loss statements can support traditional long-term investments without exposing investors to largely invisible systemic risks.
 
From this perspective, investing in oneself and enterprises one actively controls may be the only legitimate deployment of capital that qualifies as an investment in the traditional sense--that is, capital isn't being risked in rigged gambling halls and Ponzi schemes.
 
Of related interest:
 

A Couple of Things You Should Know About the Stock Market (April 15, 2013)

 

 

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Fri, 08/08/2014 - 09:35 | 5064747 hedgeless_horseman
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Stop deploying and start hoarding.

Fri, 08/08/2014 - 09:36 | 5064761 fonzannoon
Fri, 08/08/2014 - 09:42 | 5064786 Grande Tetons
Grande Tetons's picture

Interesting. What is your take?

Fri, 08/08/2014 - 09:46 | 5064824 fonzannoon
fonzannoon's picture

My guess is that Putin's propaganda machine is as functional as ours is. Meanwhile things just deteriorate everywhere at a different pace in different ways. The only question is do we buy the dip in early Sept or do we have to wait until early october?

 

Fri, 08/08/2014 - 09:52 | 5064859 Grande Tetons
Grande Tetons's picture

Meanwhile things just deteriorate everywhere at a different pace in different ways.

Bullish? Yeah. Why not? No sarc. 

Fri, 08/08/2014 - 10:49 | 5065165 0b1knob
0b1knob's picture

What about "investing" in Malaysian airlines?   All trading is halted in the stock.  Looks like the minority stockholders are about to get GM'ed.

http://money.cnn.com/2014/08/07/news/malaysia-airlines/index.html

 

Fri, 08/08/2014 - 09:54 | 5064869 negative rates
negative rates's picture

Check the weather in November and that should provide some guidance.

Fri, 08/08/2014 - 10:22 | 5065001 dracos_ghost
dracos_ghost's picture

I say mid-October, just before elections.

The only question is do we buy the dip in early Sept or do we have to wait until early october?

 

 

Fri, 08/08/2014 - 09:46 | 5064821 Urban Redneck
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Needs corroboration... otherwise the sign could be an accurate explanation.

Fri, 08/08/2014 - 09:47 | 5064831 fonzannoon
fonzannoon's picture

yeah...needs corroboration. If that had been a shelf in a Stop and Shop in the U.S it would be the headline article on here for 3 straight days.

Fri, 08/08/2014 - 09:52 | 5064854 madcows
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The FSA/EBT-ers did it to Walmart in a matter of hours.  Just wait until the collapse.

Fri, 08/08/2014 - 10:15 | 5064977 Urban Redneck
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But at Wallyworld no one would go the effort of putting out a sign that says the refrigerator is broken, much less break out the buckets and yellow gloves for cleaning up a fictitious mess.

Fri, 08/08/2014 - 11:19 | 5065364 TMLutas
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In any sane world, if you have no stock, you shut down the shelves that cost you money because they're lighted and have coolers running. Defrosting generates a mess. 

Fri, 08/08/2014 - 09:36 | 5064758 Jim Shoesesta
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The lack of comments on this post is really all the comment needed. 

Fri, 08/08/2014 - 09:46 | 5064828 Jack Sheet
Jack Sheet's picture

no comment.
This concludes this comment.

Fri, 08/08/2014 - 09:41 | 5064768 NoDebt
NoDebt's picture

We're all speculators now.  The concept of traditional long term investing died a painful death in 2000.  We pumped a few more rounds into the carcass in 2008 just to be sure.

Fri, 08/08/2014 - 09:41 | 5064785 danpos
danpos's picture

There's a slight mistake in that chart.

Most traders buy at the top, and sell at the bottom.

Fri, 08/08/2014 - 09:42 | 5064801 NoDebt
NoDebt's picture

Heh heh.  Yeah, there's is always that, isn't there?  I wish I knew the guy who did those buys and sells- I'd like to hire him.

Fri, 08/08/2014 - 09:49 | 5064848 Jack Sheet
Jack Sheet's picture

they were part of an extensive "retrotest" of a new proprietary oscillator.

Fri, 08/08/2014 - 09:47 | 5064835 Jack Sheet
Jack Sheet's picture

lulz. didn't see your comment when I posted further down

Fri, 08/08/2014 - 09:42 | 5064793 danpos
danpos's picture

Investors, on the other hand, are prudent enough to buy low, and sell lower.

Fri, 08/08/2014 - 09:46 | 5064825 Jack Sheet
Jack Sheet's picture

I posit that those BUYS and SELLS are bullshit labels attached after the fact.

Fri, 08/08/2014 - 09:49 | 5064836 orangegeek
orangegeek's picture

call it what you want Chuck

 

what matters is whether you are either making money or you are not

Fri, 08/08/2014 - 09:49 | 5064839 adr
adr's picture

Real world business is not affected by a minute to minute news feed.

Wall St. is, because Wall Street has nothing to do with real business.

Orders need to be planned over a year in advance. Production timetables are three to six months. Once a buying season is done, it's done. There are small reserves of open to buy dollars to purchase fast selling product, but not enough to cover any real increase in demand.

Stock moves are pure fabricated bullshit, manipulated by the people that can profit off them. Stock A going up or down 2% doesn't mean anything to the production and sale of real goods, because the decisions regarding them were already made long before the stock moved.

Can you imagine a purchasing agent making updated decisions based on what his company's stock is doing. A decision could never be made. Which is probably why just about every company is getting out of making anything real and just focusing on pure BS that has an effect on share prices.

Nobody showing up on Fox Business, CNBC, Bloomberg, etc could run a real company focused on the production and sale of real goods because most CEOs have absolutely no knowledge of a real business cycle. Today most CEOs wouldn't even recognize their own company's products if it didn't have their logo plastered on it.

Fri, 08/08/2014 - 11:39 | 5065474 eclectic syncretist
eclectic syncretist's picture

+50

Fri, 08/08/2014 - 10:00 | 5064876 medium giraffe
medium giraffe's picture

There is no fucking difference.  You might make 'an investment', which means you walk away from it and hope it does well, but that's just trading with ignorance and laziness.  I've had a trade on JPY since 2011. Is that an 'investment'?

"

In general, investing is putting capital at risk for the long term, based on a trend or story that the investor believes will have a material impact on whatever financial vehicle he has chosen to invest in. In general, trading is shorter-term and technical-based. A trader might buy and sell the investor's chosen financial vehicle many times, based on technical trends and indicators.   "

What a crock of shit.
Fri, 08/08/2014 - 10:06 | 5064919 Dr. Engali
Dr. Engali's picture

Not true. I have positions that I've held onto for years as my core holdings, and then I have short term trades that may last a day, or even a week. There are big differences between trading, investing, and being a rentier.

Fri, 08/08/2014 - 10:44 | 5065114 medium giraffe
medium giraffe's picture

Appreciate what you're saying Dr. E (as I appreciate many of your posts), but to my mind they are one and the same.  I've taken some deep breaths, seems I got out of the wrong side of bed this morning, so let me explain.

If we cut through the terminology, both are the same, with the same function and same goal - more accurately termed speculation.  Building in differing syntax is misleading, and dangerously so I think.       (sorry if this sounds like I'm writing in a demeaning fashion, just going through the train of thought)

Firstly, we hear a lot about how traders are causing huge problems for society at large, and rightly so (particularly whales and LIBOR magicians).  So for a start, the word 'investor' is much more socially acceptable.  The problem I have in this respect is that it allows a false division when thinking about economic issues.  By seperating traders and investors, the investor camp gets to blame the trader camp for all of the worlds woes without acknowledging that massive speculation in all of its guises is a problem, and that the people who are 'investing' are not part of the problem.  It's really just a sliding scale that we are all sitting on.

Secondly, the term 'trading' is more akin to 'gambling' for most, whereas 'investing' is something sensible people do.  For people who have saved and want to make a return, they head off to their local wealth management bucket shop, hand over their nest egg and come back in 12 months to see how things are going.  'Traders' are known to sit glued to screens looking all manner of magical wiggly lines.  The seperation of the two might mean (and often does), that 'investors' don't need to worry about macroeconomics, or keeping up with news, or even looking at a chart.  This is irresponsible, and it is this lack of personal responsibilty that allows the poor bastards to get fleeced over and over.

When people talk about their investments, I make a point of highlighting the fact that they are taking a trade - it refocusses personal responsibility to where it ought to be.

And yes, they might not be exactly the same, dividends, carry trades, etc etc, and investment in a company might be because you actually want to support that company, but the means are the same, the ends are the same, the goal is the same.  And everyone wants to score a 10 bagger, no matter where their proclivites may lie, no?

 

 

Fri, 08/08/2014 - 11:16 | 5065339 Oldwood
Oldwood's picture

Life is a gamble. The point is that their is a functional difference between placing $200 on red 29 or investing in your own business. Investment requires you to actually invest yourself, your time, whereas gambling is strictly momentary short term thinking. I have done both and there is definitely a difference. Also most bets are based upon what you think others are going to do where when you invest in yourself, not only is the decision important but your actions and efforts thereafter. People who make their living from gambling will rationalize its theoretical benefits but it only moves money and creates little wealth. Building things, producing a things actually creates wealth, not just move it from one pocket to another.

Fri, 08/08/2014 - 11:27 | 5065412 The.Harmless.Jew
The.Harmless.Jew's picture

 

 

 

ticked you up because your post was impactful in that it made me laugh on a bad day.

 

But now, surely you'd like to tell us why it is a crock of shit - I'm actually interested in improving my fiat prospects.

 

 

Fri, 08/08/2014 - 10:11 | 5064945 Dre4dwolf
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Example of Investing:

Your friend has a great idea for a new product, he needs 40,000$ to bring the product to market, you invest 40,000 with your friend and in return he promises you 50% of the profits, its a similar relationship to a limited partnership.

 

Example of Gambling:

Stock Market

Casino

Online Poker

Commodity 

Shorting

 

The businesses you invest in online via brokerages are not really using the money from sale of stock to fund any business venture or expansion, the stocks only go up on the expectation that someone else dumber than you will buy the stock you bought at a higher price later, that is speculation or . . . simply gambling.

 

The stock market is legalized gambling.

 

Really we should not have equity shares, unless those equity shares represent a portion of the profits (aka dividends).

The only "real" stocks are those that offer dividends, everything else is just a "coin" and "collectible" like a "pog".

You have Best Buy coins, You have Apple Coins, you have JpMorgan Coins, they are all worthless in and of themselves.... since equity in a company is not really a tangible thing.

 

In order for it to be an "investment" the money you "invest" should be adding greater value to the company than the value of the money in your pocket.

Its not investing when the money is just being traded back and forth and sits in a brokerage account doing nothing on someones screen.

You can say you invested money into Google by buying shares, but if you are not earning a share of the profits . . . what good is it to hold onto that stock? you are flying on a wing and a prayer in hopes that someone in the future is going to buy your share for atleast break-even value.

 

What im saying is, stocks are somewhat disconnected from the true value of a company nowadays, and they are more or less used as gambling tokens rather than a legitimate capital allocation tool or investment tool.

 

Fri, 08/08/2014 - 10:14 | 5064966 fonzannoon
fonzannoon's picture

why should gambling be illegal?

Fri, 08/08/2014 - 10:18 | 5064990 Ghordius
Ghordius's picture

why should gambling be legal for companies that are too big to fail and so going to be bailed out is more the question, I think

personally, I have nothing against gambling. I hate though corporate suits gambling with other people's money, then if the win, they cash in, while if they lose, we pay

Fri, 08/08/2014 - 10:21 | 5064999 fonzannoon
fonzannoon's picture

What about the part where the fed drops rates to zero and forces grandma and everyone else into the casino to look for income?

Why do we even bother pontificating about all this? I'ts over. It's been over for a long time. We are just pissing into the wind. 

Fri, 08/08/2014 - 10:36 | 5065067 Ghordius
Ghordius's picture

fonz, that part is for the megabanks, too. and the UST. and no, it's not over, not in my opinion. many outcomes possible

Fri, 08/08/2014 - 10:43 | 5065123 fonzannoon
fonzannoon's picture

I agree it's not over, I just think they can't walk it back.

Fri, 08/08/2014 - 11:20 | 5065367 Oldwood
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The market does not make income. It takes wealth from one person and provides it to another. Stocks have no utility or real value. They are a chip at the casino and outside of the casino they are worthless.

Fri, 08/08/2014 - 14:38 | 5066667 N2OJoe
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Who could possibly downvote this?

Fri, 08/08/2014 - 10:19 | 5064992 Dre4dwolf
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It shouldn't, but people have a right to know the odds and they shouldn't fool themselves into thinking an investment in the stock market is anything but online gambling.

The word investment seems to imply in peoples heads that its somehow safer than plunking down their life savings in a game of baccarat , in many situations you would actually have better odds of earning a return, playing baccarat than you would buying a lot of stocks . . . 

 

Also its somewhat rigged when half these corporations are TBTF and pass losses onto the public, while privatizing any gains in the form of bonuses for 1 ~ 4 people at the top.

If it was all legit gambling with transparency .  .  . it would be fine, but its not, its a shell game.

Fri, 08/08/2014 - 10:31 | 5065029 Dr. Engali
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"Its not investing when the money is just being traded back and forth and sits in a brokerage account doing nothing on someones screen."

 

Not true. If people buy stock on the open market and hold it, that adds value to the company because the company can continue to access the capital markets due to the demand for their stock. If nobody wants to hold on to their stock, there is no access to the capital markets.

Fri, 08/08/2014 - 10:54 | 5065211 Dre4dwolf
Dre4dwolf's picture

That only works if the corporation has a large reserve of shares to sell, once the shares are sold and the market is saturated, shares and money just bounce between "investors" aka gamblers.

The shares outstanding become worthless once the market is saturated because the corporation no longer can sell those shares to raise capital.

 

What im saying is, the most valuable time for a corporation to issue shares is during an IPO, because they get capital to do something.

But those shares once gone to market, have no real tangible connection to the corporation they represent anymore, even though they are supposed to represent a share in ownership, if the company has a billion dollar in assets, chances are you aren't going to get a chair in the mail or a desk, or a delivery van, the company is not going to sell its assets to pay share holders a share of the profits.

Thats why the only shares with any real value are shares that offer dividends, everything else is a scam paper, selling rights to nothing.

Even if the company goes bust, you as a common share holder usually get nothing, even though yesterday that company might of been worth "billions".

 

Fri, 08/08/2014 - 11:07 | 5065272 Dr. Engali
Dr. Engali's picture

A corporation can always access the capital markets even if they have no shares in treasury as long as there is demand for their stock. All it takes is for one or more of the firms to underwrite more shares (for a fee of course) and sell them to traders and investors. 

Fri, 08/08/2014 - 11:40 | 5065480 Oldwood
Oldwood's picture

So why all the buy backs if stocks elevating in the open market is such a boone to the issuing company? Especially at all time highs? If high stock evaluations are so precious how come businesses that have very high IPO prices based on zero earnings. It seems few use this initial money for development as much as acquisitions. Make any analysis you choose. The markets primary function is the exact same as a casino, to make the casino owners rich. And like any casino that wants to stay open they must calculate how much loss (winnings) they will allow to incentivise the players. Nothing more. The best part is you can set about in your suite or just a comfortable pair of shorts and "make" money off of people you deem to be less smart or as informed as yourself, without doing anything that would be perceived as productive. I used to wonder about those people who would deliberately grow the nails to ridiculous lengths. What possibly could be the benefit? I dawned upon me that it was simply a symbol showing their complete lack of use of their hands. Today their is a real disgust for working people, blue collar people, the stuff Americans are too good for. Well, I guess we will see how we survive when everyone is too good to work and only wants to sit in an air conditioned casino placing bets for a living. Waste and fraud can always be tolerated in small quantities. The test of value or viability is if everyone did it or least the majority, would our economy, our society survive.

Fri, 08/08/2014 - 12:04 | 5065582 Dr. Engali
Dr. Engali's picture

That has nothing to do with the discussion at hand. We are talking about a company's ability to access the capital markets. What they do with that capital is another topic.

Fri, 08/08/2014 - 14:39 | 5066681 Oldwood
Oldwood's picture

Sorry, I thought we were talking about the stock market as a casino. If what a stock is or what it does is not part of the discussion, than I am confused.

Wouldn't it be nice for business to have access to capital markets due to the actual productivity or profitability, rather than its stock worth, which can change in 30 seconds or less? Another false rationalization for gamblers. If you could only be doing it for the children...

Fri, 08/08/2014 - 16:10 | 5067252 FrankDrakman
FrankDrakman's picture

Wouldn't it be nice for business to have access to capital markets due to the actual productivity or profitability

Uh, most companies in start up mode burn cash for a couple of years before they turn a profit. Those are the companies that MOST need functioning capital markets - without access to capital when they are not making profits or products, THEY NEVER GET OFF THE GROUND. And while that early seed money is often from family, friends, or angels, they all put it in with the expectation that AS THE COMPANY BECOMES PROFITABLE, the value of the shares will increase. And the final piece of the puzzle is those early investors hope to recoup some or all of their initial investment WHEN THE STOCK BECOMES PUBLICLY TRADED AND THUS LIQUID.

Sorry for all the CAPS, but these are pretty basic points that anyone with any expertise in capital markets knows.

Fri, 08/08/2014 - 15:32 | 5066976 FrankDrakman
FrankDrakman's picture

oh, good lord. While I agree that buying shares on the open market is not the same as buying at an IPO, in terms of what the company gets, the following are all true:

  1. In the absence of a reasonably liquid secondary market, the ability to sell IPO's is severely limited.
  2. Buying shares implies some degree of ownership, and some institutional investors are now using that power to get greater returns.
  3. While I agree that buying shares that will NEVER pay dividends is acquiesing to the 'greater fool' theory, MS and Apple (and doubtless Goog eventually) finally started paying dividends. It happens when a company can no longer find enough exciting new opportunities to invest (or perhaps a majority of stockholders - one of the other theoretical advantages - forces the company to start paying dividends).
  4. Finally, stock buybacks, which are quite common, are one way for a company to return capital to shareholders without paying dividends. In fact, some people prefer it to dividends, because of favourable tax treatment.

Are there many things wrong with today's markets? Of course. But your blanket condemnation is just as wrong.

Fri, 08/08/2014 - 10:20 | 5064996 Atomizer
Atomizer's picture

You may have better odds in visiting a casino or playing the lottery. My advice, get out of debt and pay in cash transactions. 

Wall Street is trillions of dollars in debt. Synthetic derivatives debt vehicles have failed. It's unrepayable debt you fucking morons. You should be held responsible dickweeds. Guess who's signature is on the contract? Let me repeat, not one fucking American signature is on that contract, just yours.

You own the debt fuck knob. Buy the way, keep looking over your shoulder. 

Fri, 08/08/2014 - 10:41 | 5065064 Downtoolong
Downtoolong's picture

The most ridiculous job in the world must be that of a daily market reporter. Once or twice a day they must come up with bullshit fundamental explanations for why broad market indices went up or down by .5-1%. Lately these seem to focus on changes in the status of world crisis, Fed policy statements, economic statistics, etc. (e.g. Oil Prices Fall On Hopes For Middle East Cease Fire). God forbid they should tell us it’s probably just noise or they have no idea why some oligarch in China or Russia bought or sold a size position.

I must admit, it’s worth something though. It guarantees me at least one good laugh every day.   

Fri, 08/08/2014 - 11:11 | 5065319 Oreilly
Oreilly's picture

Thank you, CH-S, for clearing up the reasoning behind your previous post related to technicals in the markets.  Your definitions are simple, and anyone that quibbles with them is largely doing it because you've chosen to write a blogpost and not a textbook (for those that don't know the difference, one is shorter and takes some libereties while the other is comprehensive and covers all the issues).  I'll take it that your concern with reversion to the mean differs for trading vs. investing, and that you need to define what you're interested in doing with your money to respond accordingly.  But my comment from before still stands: I'm sick of a society that forces me to gamble (long term or short term) with the capital generated by the current excess of my labor as a hedge against times when I no longer will be able to labor.  It's one of the reason I've purchased small quantities of gold on a regular basis ... but even gold is a gamble these days. 

Yes, investing in things I control is the best bet, but it's still a bet.  And why am I forced to bet at all?  I'm forced to bet because of the society I live in and those who control its desire to rake off the top on all the bets placed.  It feels more like a casino at times then a society, but you have no choice but to play the game.  And for those who sell it all and move to a solar powered house in the country with ample dried food in the storage shed, you're still playing.  You may have changed the rules a little, but eventually the game master comes looking for you, too, when it's worth his while.

Fri, 08/08/2014 - 12:26 | 5065654 tumblemore
tumblemore's picture

Exactly. What the banking mafia have created isn't capitalism at all it's simply gambling with (massively leveraged) depositor's money combined with a guarantee of taxpayer bailout if the gambles fail - with the bailout guarantee itself then feeding back into allowing the massive over-leveraging and incentivizing more risky gambling.

 

 

 

 

Fri, 08/08/2014 - 12:21 | 5065659 JDFX
JDFX's picture

Investors, hold onto their money whilst hoping to avoid having their throats cut.

Traders , cut throats. 

JD

 

Traders can go back to helping old ladies cross the road on the weekend. 

Fri, 08/08/2014 - 14:44 | 5066705 Oldwood
Oldwood's picture

Does the term Muppet mean anything to anyone here, or was that just bullshit?

To consistently win at gambling you either need to know what others do not (which would seem to be considered insider trading) or you must be able to effect the outcome of the bet (which would be considered fraud). Other than that, its flipping a coin.

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