Is It an Investment or a Bet? By: Gabriel PotterMBA, AIFA® 2017.05.31

You can bet on anything online or in gambling meccas like Macau or Las Vegas, from the winner in a sporting event to a real-life occurrence.  For events with real-world consequences, there are purchasable securities which straddle the line between investments and bets.  For instance, in the past US Presidential race, we described how the currency exchange rate between the US dollar and Mexican Peso was used as a barometer for the market’s expectation of the likely winner.  Here’s a more recent example:  just this week, Goldman Sachs purchased $2.8 billion dollars (face value) of Venezuelan bonds for the discounted price of $865 million dollars.  In case you haven’t been watching the news, Venezuela has been undergoing massive government protests and demonstrations for months and, with food and basic necessities critically low, the country is dangerously close to a collapse.  Let’s ignore the extremely messy political implications of this investment for a moment and just consider the bet mathematically.  The lifeline of funds given by Goldman Sachs might give Venezuela time to improve its situation.  Roughly speaking, there are three probable ways this bet can turn out.  First, if the current Maduro government manages to retain power through this crisis, and somehow manages to get state run oil enterprise to generate income and pay off face value of its debts completely, then Goldman Sachs may have tripled its money.  Second, if the government succumbs to pressure and transitions out, there may be some deal with debt-holders to get partial payments on the face value of existing debt.  Finally, if the country undergoes a violent collapse, in which case the new government, is unlikely to honor any debts given to the prior administration and Goldman Sachs loses hundreds of millions of dollars.

When the probabilities of outcomes are so unknown that the difference between a bull case scenario and a bear case scenario is either tripling your money or losing all of it, we can safely assert that the Goldman Sachs bond purchase is not an investment in the country.  This is a bet, not an investment.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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