Self-directed investing in the stock market is difficult for those who are emotional and easier for those who are unemotional. The level to which emotions enter into the decision-making process is not a straight line where one person is a basket-case and on a 45-degree angle, the last person is a hard-core numbers nut. In my opinion, the distribution is more like a bell-shaped curve where 70% base the majority of their investment decisions in whole or on a high-substantial basis on emotions. The long-term results of most investors bear out more failure than success.
Investing is like a game of poker, but not in the sense that poker is gambling. Nope, not a bit. The deck, unless stacked, can be counted. If the deck is played without being “sweetened” by the dealer, then counting cards will result in superior result for those who can count cards. That should not come as a surprise.
But investing, like poker in Vegas, is not played with a single deck but several decks, and the decks are switched out on a regular basis. Why? House rules and house rules. This means the house needs to win on a steady basis by a certain percentage and the house makes the rules. Again, pretty basic stuff.
But, and it’s a big but, emotions sway bets among many, including those who are pretty good at counting cards. This is something that horse tracks count on.
Oh, those horses can be a silly bunch. Counting cards is one thing, but horses, well by George, they are a breed of their own as are the owners of the tracks. The owners of horse tracks have a “spread” of approximately 17 to 20 percent. In other words, you bet a hundred on ten different races, you’re likely going home with $800. By the 9th and 10th race, you’re down and ready for the big kill. Why? Because you’re down. Didn’t you read what I just wrote? You’re down so it’s time for that end of the day, big kill.
Logic and unemotional calculations tend to go out the window with the wash-water as the day drags on. As the day is winding down, the odds on the long-shots to win, place, or show go down dramatically. Why? Because those who are left are far more likely to bet on the long-shot for an end-of-the-day killing. The same is true for poker. Ralphie from Jersey is down twenty thousand during his weekend at Big Lou’s Gamble-Ramble, a few streets down and over from the strip. Ralphie has a good hand, not great, but good enough and so he goes all in with his last $5,000. Full house beats a Flush and Ralphie is now flush out of cash. Until that last hand, Ralphie never lost more than a few hundred. Yes, he lost a lot over two days, but that last hand was a bust and he’s headed back to Jersey on the bus instead of a plane.
Thinking in terms of bets is something those of us who have been in the business of investing money for others for many years fully understand. There is nothing that’s guaranteed. We cannot predict but we can forecast. We do not use crystal balls but rather use crystal clear focus. But the focus is not solely on the numbers (quantitative) but also on the ebb-and-flow of public opinion (qualitative), coupled with a solid dose of horse-sense, or should I say: “Common sense.”
Buy low and sell high sounds easy until you say and think of it like this: Every year I want you to sell your best investment and put the money into the worst flea-bitten dog you have.
There are no secret formulas, magic tricks, or bunnies in the hat. Instead, there are those of us who understand that logical, organized, and process-based investing gives far better odds of winning the long-game than emotional and knee-jerk Hail Mary’s.