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Shares of GameStop and other companies or assets that shot up in value in recent weeks are now droppinglike stones. While I feel sorry for the many investors who will likely lose a lot of money, the stocks’ return to Earth is actually a good thing – if you want to avoid financial meltdown to the long list of crises the U.S. is facing.
The reason has to do with what financial markets are – and what they are not – as well as what happens when prices of stocks and other securities become untethered from the fundamental value of the assets they’re meant to represent.
As a finance professor who does research on how markets respond to new information, I believe it is important to maintain a close link between security prices and fundamentals. When that stops happening, a market collapse may be not far behind.
Capital markets aren’t casinos
Some have portrayed GameStop as a David vs. Goliath story. According to that narrative, the big guys on Wall Street have been getting rich gambling on the stock market for years. What’s the problem when the little guy gets a chance?
The first thing to keep in mind is that markets aren’t a big casino, as some seem to believe. Their core purpose is to efficiently connect investors with companies and other organizations that will make the most productive use of their cash.
The Wide Area Progressive (WAP) Slot Machines Are Some of the Worst Bets in the Casino. McNabb was the first guest to place a wager at the new DraftKings Sportsbook at del Lago Resort & Casino. The 6,000-square-foot facility opened Friday with a ribbon-cutting ceremony and speeches.
Accurate market prices, meant to reflect a company’s expected profits and overall risk level, provide an important signal to investors whether they should hand over their money and what they should get in return. Companies like Apple and Amazon simply would not exist as we know them today without access to capital markets.
The more jaundiced view of markets focuses on episodes when markets seemingly go crazy and on the speculative gambling behavior of some traders, such as hedge funds. The GameStop saga feeds into this storyline.
But GameStop also illustrates what happens when stock prices don’t reflect reality.
- 1/ST BET utilizes bank-level security to ensure that all transactions and customer information is secure. 1/ST BET and Xpressbet have built a reputation for nearly 20 years as a place where wagering is as.
- Aug 31, 2017 I visited my first casino, The Sands in Las Vegas, in 1996. The VP of marketing at the company where I worked told me that the first thing I should do when I got there was place a bet on “7 black” at the roulette table. He thought this was big fun, because, of course, the 7 on the roulette wheel is red.
- The first legal casino to operate in the United States outside of Nevada opened in Atlantic City. Several of the blackjack and dice tables have a minimum bet of $25, with a maximum of $8,000.
The GameStop bubble
GameStop fundamentals are, to put it mildly, lackluster.
The company is a brick-and-mortar chain of video game stores. Most video game sales now take place as digital downloads. GameStop has been slow to adapt to this new reality. Its revenue peaked in 2012 at US$9.55 billion and had dropped by a third as of 2019. It hasn’t earned a profit since 2017. Put simply, it is a money-losing company in a competitive and quickly changing industry.
The recent speculative frenzy, however, increased the GameStop stock price from under $20 in early January to as high as $483 in a little over two weeks, driven by retail investors on Reddit who coordinated their buying to harm hedge funds – costing the professionals billions of dollars.
It is clearly a speculative price bubble and has some characteristics of a Ponzi scheme. Many small investors who “get on the train” late and buy at the inflated prices – especially those attracted by the extreme price moves and media coverage – will be left holding the bag.
And sooner or later, the stock price will likely come back to Earth to a level that can be supported by the fundamentals of the company. Shares closed on Feb. 4 at $53.50, the lowest since Jan. 21.
The problems begin when that doesn’t happen until too late.
Bubbles are made to pop
Financial markets are made up of people. People are imperfect, and so are markets. This means market prices are not always “right” – and it’s often hard to know what the “right” price is.
That is true when it comes to the price bubbles in individual stocks like GameStop. But it’s also true on a much bigger scale, when it comes to a market as a whole.
Price bubbles and crashes are good for neither Wall Street nor Main Street. When the dot-com bubble popped in 2000 – after prices of dozens of tech stocks soared exponentially in the late 1990s – an economic recession followed soon after. The bursting of a housing bubble in 2008triggered a global financial crisis and the Great Recession.
Too much momentum
So markets fail sometimes, and we need sensible regulation and enforcement to make such failures less likely.
Taken in isolation, the GameStop craze is unlikely to trigger a disruption to the overall stock market, especially if its price continues to fall more in line with the company’s fundamental value. Unfortunately, this was not an isolated case. Nor was GameStop the first sign of problems.
In recent days, Reddit users have also driven up the prices of silver and companies such as BlackBerry and movie theater giant AMC Entertainment. Popular trading apps like Robinhood have made trading easy, fun and basically free.
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The share price of Tesla, for example, skyrocketed 720% last year, in large part when investors bought the stock because it was already rising. This is called momentum investing, a trading strategy in which investors buy securities because they are going up – selling them only when they think the price has peaked.
If this continues, it will likely lead to more financial bubbles and crashes that could make it harder for companies to raise capital, posing a threat to the already limping U.S. economic recovery. Even if the worst doesn’t happen, large price movements and allegations of price manipulation could hurt public confidence in financial markets, which would make people more reluctant to invest in retirement and other programs.
Warren Buffett once said about stock market behavior: “The light can at any time go from green to red without pausing at yellow.”
What he meant was that markets can turn on a dime and plunge. He saw these moments as opportunities to find deals in the market, but for most people they result in panic, heavy losses and economic consequences like mass unemployment – as we saw in 1929, 2000 and 2008.
There’s no particular reason it won’t happen again.
I visited my first casino, The Sands in Las Vegas, in 1996. The VP of marketing at the company where I worked told me that the first thing I should do when I got there was place a bet on “7 black” at the roulette table. He thought this was big fun, because, of course, the 7 on the roulette wheel is red.
I wish someone had given me some real, practical advice before I visited a casino for the first time. Since no one did that for me, I’ll do that for you. The things you should know listed below are obvious to regulars at the casino.
But they can save you a lot of money and heartache if it’s your first.
Here are the top 10 things you need to know if you’re visiting a casino for the first time:
1. The Wide Area Progressive (WAP) Slot Machines Are Some of the Worst Bets in the Casino
A progressive slot machine is one with an electronic ticker at the top which displays an ever-increasing jackpot amount. You’ll find 3 kinds of progressives:
- Single machines
- Local area progressives
- Wide area progressives
What all these games have in common is that they “fuel” the progressive jackpot by taking a percentage of each bet and applying it to the jackpot. In the case of single machines, the jackpot only grows when you’re playing that specific machine.
Local area progressives are machines within a specific casino which tie into the same jackpot. Any bets placed at any of these machines grow the jackpot amount.
Wide area progressives are machines within a certain geographic radius. In Las Vegas, the most famous wide area progressive slots are the Megabucks machines. Literally, thousands of slot machines power these jackpots, and they’re correspondingly huge – at least $10 million.
The problem with slot machines with jackpots this large is that their payback percentage is inferior to the payback percentage on a flat top machine. (A flat top machine has a fixed jackpot amount.)
A typical Vegas slot machine has a payback percentage of at least 90%. A wide area progressive has a payback percentage of 80% or less when you discount the effect of the progressive jackpot. Since you only have a 1 in 15 million chance of winning the top jackpot, it’s sensible to deduce that amount from the overall payback percentage for the machine.
2. Payback Percentage Is How You Measure the Odds for Gambling Machines
You might have heard of the house edge. That’s a term used to describe how good or bad the odds are for table games. It’s a mathematical prediction of how much you’ll lose per bet on average over a tremendous number of trials.
The house edge is expressed as a percentage. If a game has a house edge of 1%, the casino expects to win $1 every time you bet $100, over the long run. In the short-term, anything can happen. What most gamblers don’t realize is that they long run is longer than they think.
The payback percentage is the flip side of the house edge. It’s the amount of money the casino expects the player to win back for every bet. It’s also expressed as a percentage. For example, if I tell you a game has a 99% payback percentage, the casino expects you to win 99 cents every time you wager a dollar – again, on average, over time.
You can use house edge and payback percentage to compare the odds for different games.
3. Video Poker Machines Have Transparent Payback Percentages that Are Superior to Slot Machines
The higher the payback percentage, the better. The problem with slot machines is that they’re the only game in the casino where you can’t know what the payback percentage is. In fact, the payback percentage for slots is usually the lowest in the casino.
That’s one of the major differences between slots and video poker, in fact. On a video poker game, the probability of getting a result is something you can calculate. The random number generator on a video poker game emulates the same odds as a standard deck of 52 cards.
You need 2 pieces of data to calculate the payback percentage for a gambling machine:
- The prize amounts
- The probability of winning those prizes
Unless you’re Rain Man, you can’t just look at a video poker pay table and know the payback percentage.
But computer programmers and gambling writers have analyzed almost every video poker pay table you can imagine and published the results online.
A quick search of Google can help you compare video poker machines to find the ones with the best odds.
Also, even the video poker games with the worst odds are usually better than slot machines.
4. Drinks Are Free in the Casino
This isn’t true in every jurisdiction, but in most major casino destinations, drinks are free – but only if you’re gambling. (Last time I was at the Winstar, they were charging for alcohol, even if you were playing.)
You still need to tip your cocktail waitress, though. A buck or two is sufficient.
But just because the drinks are free doesn’t mean you should over-indulge.
Casinos offer free drinks because alcohol impairs your judgment. You’ll gamble over your bankroll and lose more money than you intend to if you drink too much.
Don’t be that guy who thinks he’s more macho than the other drinkers in the casino, either. He’s the guy who loses the most money, regardless of what he claims.
No one likes that guy.
Also, a word to the wise:
If you can’t control your drinking, you probably can’t control your gambling, either. You might be better off avoiding casinos altogether.
5. Table Games Offer Better Games than Gambling Machines – With One Exception
The rule of thumb for gambling at a casino is that the easier the game is to understand, the worse the odds are.
It’s easy to understand a slot machine. You put your money in, spin the reels, and hope that winning symbols line up.
Blackjack, on the other hand, is harder to understand. You have to learn the values of the cards. You have to know what your options are when playing each – hit, stand, double down, split, etc. And it helps to know what the right move is in each situation.
But look at the difference in house edge.
The house edge for most slot machine games is at least 7%. Even if you’re terrible at blackjack, the house edge isn’t more than 4% or so. If you spend a little time learning basic strategy, you can but the house edge to blackjack down to 1% or less.
Even the table games with no skill required, like baccarat, craps, and roulette, offer a lower payback percentage than most slot machine games.
There’s one exception, though – video poker machines.
Good video poker machines combine the thrill of playing a gambling machine with the low house edge of a table game.
Much of this is because video poker games are based on card games. The random number generator duplicates the odds you’d see if you were dealing hands from a 52-card deck.
Slot machine payback percentages usually range between 75% and 93%. The outliers might top out at 97% or 98%.
Video poker payback percentages range from 92% up to 100.1%. Those numbers assume that you play with a reasonably correct strategy most of the time.
6. Betting Systems Don’t Work
It won’t take long at the casino before you meet someone who’s a proponent of the Martingale or some other betting system. It’s tempting to think that a betting strategy like this might work, but it doesn’t – at least not in the long run.
Here’s how the Martingale System works:
You start by defining a single betting unit and choosing an even-money bet. The most common game people try the Martingale on is roulette, which has several even-money bets that seem to have a close-to-50% chance of winning.
You then start by betting a single unit. If you lose, you double your bet, hoping to recoup the previously lost bet along with a single unit profit. You repeat this doubling of your bets every time you lose.
Here’s an example:
You bet $10 (one unit) on red. The ball lands on black, so you lose your $10. The system says you double your bet, so now you bet $20 on red. The ball lands on black again, so you lose $20. The system says you double your bet again, so now you bet $40. This time, the ball lands on red, so you win back the $30 you lost on the previous bets. And you’re ahead by $10.
This can work well in the short run, but people have a few misunderstandings about the viability of such a system.
The first is the assumption that long losing streaks are terribly unlikely. The truth is, losing several times in a row is a lot more likely that you probably think.
The second is the lack of understanding of how fast doubling your bets makes you put money into action. $10 is no big deal, and neither is $20. Heck, even $40 isn’t that much for most people.
But if you lose 4 or 5 times in a row, you’re betting hundreds of dollars per spin.
It doesn’t take long for you to get to a point where the next bet in the progression is beyond your bankroll or beyond the betting limits at the table.
All the Martingale System does, in the long run, is get you some small wins here and there, all of which will eventually be wiped out by a huge losing streak.
The house edge for a casino game remains unaffected by your betting system.
7. Casinos Offer Classes in How to Play Their Games
Some people who are new to the casino adventure are intimidated by table games – especially craps. That’s too bad because these games offer better odds than the slot machines. They’re easy to learn, too. And I think they’re more fun.
But you don’t have to try to puzzle out how to play blackjack, craps, or roulette from tutorials on websites like this one. You don’t even have to buy a book or an instructional video about how to play.
Almost all casinos offer classes on how their games work. To find out when these games are scheduled, just ask anyone in customer service at the casino. If the specific individual can’t tell you what the schedule is like for these free classes, they can point you in the direction of someone who can.
These classes are usually held in the mid-morning. They’re usually followed by actual game-play, but that’s optional.
I learned to play blackjack from my mom at the kitchen table. Roulette was so easy I just sat down at the table and got the hand of it.
But I learned to play craps at a class at the Planet Hollywood Casino in Las Vegas.
You can also learn to play these games using free games at Internet casinos, but I think you’ll enjoy the free classes at the casino.
One caveat, though:
Take strategy advice from casino dealers with a grain of salt. For example, they love to explain hedging your bets in craps at these classes. That’s a lousy strategy.
8. Almost Everyone Working in or Near the Casino Industry Rely on Tips to Make a Living
You don’t have to dole out all your money to everyone working at a casino. But it sometimes feels like it. If you want to be a good person with a little bit of class, remember to tip a reasonable amount for various services.
If you eat at a buffet restaurant, a dollar or 2 for each person is a reasonable tip. Your waitress is only refilling your drinks, not providing full table service, so that doesn’t warrant a 20% tip.
Real sit-down restaurants work the same way in Vegas as anywhere else. You should tip a minimum of 20% in a casino destination. If you’re happy with the service, consider 25% or 30%, instead.
Casino game dealers deserve tips, too. It’s customary to throw them an occasional tip after a win. If you want to look sophisticated, place a bet on behalf of the dealer. This is especially common at the blackjack table.
A good rule of thumb is to plan on using 5% to 10% of your starting bankroll for tips to the dealer. It’s up to you to decide when to tip. Some players tip when they’re ready to leave the table, while others tip during the game. I think it’s more fun to tip while you’re playing.
Cocktail waitresses deserve at least a dollar for bringing you a drink. I’ll often tip more than this early in the evening to make sure I’m not ignored throughout the night, though. If you’re planning to spend several hours drinking in the casino, consider giving the cocktail waitress $10 or $20 for the first drink she brings you.
You can scale back after that but occasionally provide a larger tip to keep her coming around.
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It’s also customary to tip bell hops, taxi drivers, and the hosts who seat you at the various shows. Tipping the host at a show can get you a better seat. You can even tip the person at the check-in desk in hopes of getting a room upgrade. It’s customary to include a $20 or $50 with your credit card when you check in. Don’t be shy. Ask if they have any upgraded rooms available at the same price as your room.
If you get a reputation as stingy with your tips, you won’t have as much fun at the casino. No one likes that guy.
9. Casinos Have Their Own Rules of Etiquette
You’ll pick up on the most common rules of etiquette in the casino eventually. But a little knowledge in advance can help you be less of a bore.
I’ve already covered tipping, but there are other unwritten rules you should know about.
The most important rules of etiquette, at least from the perspective of the casino’s staff, relate to the handling of cash. You never hand a dealer money. You put your cash on the table, and the dealer exchanges it for tips.
This is for security purposes, but it also protects the dealer from accusations. By putting the money on the table, you make the entire transaction visible to the cameras above the casino floor. (These are called “the eye in the sky”.)
Kenny Rogers is right, too – never count your money at the table. It’s crass. It’s also dangerous because casinos attract pickpockets and thieves just like any other den of iniquity.
Specific games have specific rules of etiquette, too. For example, in a single deck blackjack, it’s customary to pick up your cards. But in a game dealt from a shoe, you should never touch your cards.
10. You Should Budget More Money for Your Trip than You Think
The biggest mistake I made the first time I went to Vegas was underestimating how much money it would cost. After all, Vegas is famous for cheap meals and free (or close-to-free) entertainment.
The thing is, all these cheap and free experiences are come-ons to get you gambling. And gambling is always more expensive than most first-time gamblers expect it to be.
I recommend having multiple budgets for your trip, too. Your gambling funds, especially, should be entirely separate from all your other expenses.
I have a friend who went to Vegas and gambled almost all his money away the first day. He barely had anything to eat for the rest of the trip, and he spent most of the rest of his trip watching television in his hotel room. He had enough sense to set aside money to get himself back to the airport.
I can’t imagine a more disappointing end to a trip to Vegas, though.
You should have a budget for meals, a budget for entertainment, and a budget for getting to and from the things you want to do while you’re there. Your gambling budget should be separate from all that.
I suggest drawing up a budget for each of those, based on what you’ve learned about prices there from Frommer’s or from travel guides on the Internet.
Then add 20% to each line item in the budget.
You’ll be better off having too much money for your trip than too little.
Conclusion
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Casinos are a lot of fun, especially if you’re visiting for your first time.
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But gambling and casino entertainment can also be intimidating for the beginner. They don’t have to be, though. With a little bit of education and some planning, you can have a successful first trip to the casino.
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If you’re like most people, your first trip to the casino probably won’t be your last.