I trust you’re enjoying this series on Lessons from the Casino. Although many investors would not consider themselves “gamblers,” their investment decisions call their self-judgement into question. That’s why I wanted to take a few moments to compare approaches within the two arenas.
So far, here’s the lessons we’ve considered from the Casino:
Avoid Debt to Create Investment Equity
Walk Away a Winner by Putting Cash in your Pocket
Know the Rules of the Game before Playing
Don’t get Raked over the Coals… Know your Broker(age)
Go with the Trend
Today, I want to look at a popular Casino game where people often come and go quickly… They see it as easy money. After all, what other game can you walk up to and plunk down cash on either Red or Black? Nowhere other than Roulette. Walk by the Roulette wheel and you’ll see three common approaches:
Random or systematic choice of numbers – It’s almost ironic to see all the numbers covered except for a few… and guess which one the ball hits on the wheel? Yip
Outside Black or Red – especially common for the person who walks up, drops some cash, and believes they’ll double up and walk away.
The Chaser – after missing their number or color, they double the bet, then double that bet, etc.
What many Roulette players forget is the reason Roulette is such a cash cow for the Casinos. Every Roulette wheel has one or two Green numbers (0 or 00).
Investors are sometimes like Roulette players. Some see a trend and either “bet” the trend investing in the stock that’s risen for the past six months, only to see it turn downward shortly after they enter. Others think, “It can’t keep going ______” so they keep adding to their position against the trend. Still others think, it’s as easy as choosing red or black… you just have to study the past and you’ll be able to predict the future UNTIL it hits green! Green? Yep, investors need to remember their is always something that is unpredictable and has a dramatic impact on the trajectory of a stock’s price. It can be the sickness or death of a CEO, an explosion at a mine, a lawsuit due to disease in a food stock, a piece of news, etc. And these items will often drive a stock, sometimes suddenly, against all rationale analysis in an unexpected direction. It’s like the green numbers on the Roulette wheel.
So, what can the average investor do to protect their investments against the unexpected? Here’s a few possibilities:
Ensure you have stop losses on all your positions to protect against further downward movement
Diversify your portfolio so one unexpected move doesn’t devastate your portfolio
Consider options to hedge your positions or currency (or ETFs)
Be at least a little bit of a contrarian… it’s amazing to see how often the masses go too far in following each other. It’s hard to change the momentum of a large mass… it’s just physics.
Prepare for the Unexpected – It’s Never just Black or Red
It may be one of the most popular casino games among amateur and seasoned gamblers… It’s not too complicated. You don’t need a PhD in mathematics to calculate your winnings. And there are a few basic principles to help you limit your risks and maximize your potential returns.
Blackjack – whether played with two, six, or eight decks of cards… the game is quite simple.
To tell you the truth, I’m not sure, despite the many books written on blackjack or the numerous strategies players share around the table, that one can win consistently… unless that “one” is the casino. Nevertheless, there is a little lesson I think we can learn from the blackjack table.
Perhaps you’ve heard of a hot or cold shoe? It’s when a dealer keeps busting and the players win or the dealer just can’t seem to lose. Either way… there’s a trend. And when there’s a trend at the table, the seasoned players take notice and change their strategies… betting more or less dependent on the trend.
OK… so this is a weak parallel… which shows my gambling ignorance I’m sure (once again). But, play along…
Go with the Trend
Hot or cold… up or down… recognize there is a trend in the markets and that momentum is very difficult to fight. Yes, there’s always a winner in the midst… but when the overall market momentum is going in a particular direction with conviction, it is difficult to swim against the tide and come out ahead. The same can be true for individual stocks. That’s why I review and highlight everyday the “Market Momentum” as I see it for that day (see the top right side of this website).
So, before you jump in or jump out of your next investment, take time to review the overall Market Momentum and then review the trend of the stock. If it’s crashing… don’t chase it down… please. If it’s already taken off and left you behind, please be cautious about diving in to chase it. And if it is gaining strength and growing in revenue sales as well as trending upward, do it… go with the trend… and may you make money on the markets every morning.
There’s a game at the Casino I have no idea how to play… but I’ve always been intrigued. It is definitely one of the most social casino games… and the loudest. Interestingly, it has a rather strange name too… CRAPS. Really, craps?
Let’s say I told you I’ve always been intrigued by craps… I’ve watched at a distance, heard all the noise and seen the successes of those around the table. And I’ve wondered… I wonder how well I’d do at this game? So, I decide to dive in and play a few hands. The first time, I hit a hard six (impressive, huh? But honestly, I have no idea what that means… I just know I’ve heard it before) and I win along with nearly everyone else at the craps table. So I make a slightly larger bet. This time, it doesn’t go quite so well… they sweep my chips away. But I knew not every roll of the dice would be a winner. Then, the guy with the biggest stack at the craps table tells the group, based on the stats at the table and his years of experience playing craps, the dice will hit a soft 8… so I join in with the others and bet the 8. And lose when the dice hit 7.
Well, before my total ignorance in craps shows through (if it hasn’t already), let me get to the question. Is that the best way to play craps? Likely not… before placing a dollar on the craps table, I probably should have learned a little about the game, perhaps even played a “pretend” game or two. But, to put money on the table before educating myself a little, practicing with play chips, etc. would be nuts and a sure way to lose my money.
It’s really not that different when it comes to investing in the markets. You may be intrigued… want to join in the fun, especially when you keep hearing how well others are doing and how much fun they are having investing. But wait, please… take a little lesson from the craps table at the casino.
Know the Rules of the Game before Playing
Before investing your first real dollar in the markets, educate yourself. I hope this website is assisting with this objective… but don’t just take my word for it. Grab ahold of an investment book or two… create a fantasy portfolio and test your ideas… track my public performance. Then, when you are ready and you know the basic rules of the game, join in the fun and I’ll do what I can to help you make money in the markets every morning!