Why successful investors avoid gambling

JOHANNESBURG – One of the most famous poker games ever recorded took place at the 2008 World Series of Poker, where Motoyuki Mabuchi, completely confident in the winning prospects of his rare four aces, went all-in, betting all his remaining chips against opponent Justin Phillips.

Then, playing one of the most statistically unlikely hands in history, Phillips revealed a royal flush, sending Mabuchi packing with nothing. To put just how highly improbable this outcome was into perspective, the odds of four aces facing-off against a royal flush are about one in 165 million. You’d need to play poker for about 18 000 years – uninterrupted – to land these odds.

For investors, this example demonstrates that no matter how sure or confident you may be, never go all-in on a single share or company. There is always the risk or chance of some crazy outlier appearing, and financial markets are simply no place for gambling.

The hope of achieving outsized returns by investing everything in a stock that seems as though it could be the next Amazon, Alibaba or Naspers is highly seductive, but the reality is that for each of these success stories, there are many other companies that have fallen along the way.

An investment in a single share raises the risk of suffering extremely large drawdowns in times of uncertainty, as opposed to if you “hedged your bets” across a range of investments. In other words, by avoiding placing all your eggs in one basket and by diversifying your investments across different industries, sectors, regions and even asset classes, you can mitigate your investment risk.