Is being random gambling?

It's funny, on MG's blog http://justadrone.blogspot.com (highly recommended reading), Travis commented that "flipping a coin" (in this case, my use of random.org) seemed too much like gambling. I respect that view, and it's not unlike comments made by a very good friend of mine, ever since I first started discussing MFI and my methodology with him. In fact, whenever I tell him about a stock movement in my MFI portfolio, we refer to it as my "dartboard" stocks.

But, am I in fact gambling? Perhaps. Much less so, I would venture, than someone in Vegas or someone buying a lottery ticket. In fact, significantly less so, I believe. Let's think about it.

I re-read The Little Book that Beats the Market recently for some insight. Let's start with this tidbit. If I select one of 25 stocks from the MFI website, I am picking the top 25 stocks over a certain threshold (in my case, I use the minimum, $50M) based on the MFI criteria. Now, I don't consider the MFI criteria to be a gambling method. I think it's very sound reasoning. Well run companies trading cheaply. Basic value investing.

So, when you have these 25 stocks, that's 25 stocks out of a universe of 3,500 stocks. You are now in the top 0.7% of the MFI stock universe. Consider it to be the inverse of the concept that buying 2 lottery tickets doesn't remotely improve your odds of winning. The difference between any of the top 25 stocks in the MFI universe is minute (at least from a percentile perspective).

However, within those 25, there will be winners and there will be losers. Hence the need for diversification. I'll be interested to see the result of Tony's study http://magicformulainvestor.blogspot.com to get an idea of the ratio. Because I do not have the time or inclination to research individual stocks sufficiently to do better than a "dartboard" approach, I actually think it is more likely than not that my conscious picks will lean towards the losers! I think I'd be gambling more if I tried to pick them myself!

Instead, by utilizing a random method, I am investing with the MFI methodology in an unbiased manner.

The other thing I am doing that I think will make a difference (though only time will tell) is following the methodology rather strictly. Buy and hold for a year. Buying at even intervals through the year. And I am absolutely not trying to time the market. If I really had the ability to time the market, I'd be a wealthy, and probably famous man. I am neither. Don't care about the latter, but working on the former. :)

-A