How To Make Money Investing In Stocks By Treating It Less Like A Casino And More Like Driving A Car
Ever heard of the Gambler’s Support Line?
My province has one and it’s for people who have been negatively affected by gambling. Investing shouldn’t be treated in the same manner as gambling. It is possible to learn how to stop “investing” under the guise of gambling, and (hopefully) tilt the odds in our favour by making a few mindset tweaks.
Naturally you’ll want the odds to be in your favour because this means you increase the chance of making money.
When you go to the casino the casino ends up winning slightly more often than you. This is why they print money. So if we can prevent ourselves from succumbing to the same fate as most gamblers, we put ourselves into a winning position monetarily and mentally.
Unfortunately most people love the mental rush from gambling, so they use investing as another vehicle to get the same dopamine response. The unfortunate byproduct of this strategy is that you will lose money the longer you do it (just like gambling).
Making and losing money empowers our emotions to make stupid decisions
If we allow our emotions from having a “gambler’s” mindset determine our decisions we end up:
Using leverage and going broke
Shorting a stock and going broke
Buying expensive stocks, only to see them plummet in price
FOMO into stocks we know nothing about
If we instead looked at investing the same way as we drive, we’d be a lot more risk averse.
Unless you have a death wish, you aren’t running red lights, or stop signs when you drive. In investing, this means your goal is to not lose money. If you do this long enough, your winners will keep you very, very happy.
Here's how to do it:
Focus on the long-term
Most investors are looking for the next “get rich quick” scheme which usually equates to making a short term bet on a very risky stock.
Here is a quick thought experiment. Which of these options would you choose?
Learn how someone made 15% on $10k for decades?
Learn how someone made $10k turn into $100,000 betting on horses in a month?
The second is so much sexier than the first at a glance.
But this is where most investors make huge errors. You should want to understand how to make 15% for decades. The graph below tells you why.
The 15% investor focusing long-term will turn $10k into $662k with much less risk than the person gambling on pony’s.
Think about the downside
Gambling is fun, it allows us to throw our inhibitions into the wind and let “lady luck” control our fate.
If you gamble with small amounts of money you can easily afford to lose, then gambling is harmless. When you are doing the exact same thing with your families life savings, then you are harming more than just yourself if you lose it all. Investing is the same.
What the gambler fails to see is that for every person who goes from $10k to $100k in a month, there are hundreds, or thousands of people who went from $10 to broke in one night.
If you have a part or all of your life savings in investments, you should be following Buffett’s Rule #1 of “never lose money.”
Every single one of the best investors survived long enough to generate mind boggling returns. This in turn gave them financial freedom, and the ability to get paid to think. Sounds like a pretty sweet deal to me.
One thing they all did in common: they thought about downside and how to reduce it.
Do not make important investing decision in highly emotional states
The majority of investors, retail and institutional move with the herd. This means:
When prices drop, they exit.
When prices rise, then enter.
This is a mistake for two reasons. 1. When you sell when prices drop you are losing money. 2. When you buy when prices rise, the risk of ownership increases because you are buying overpriced assets.
It seems counterintuitive, but the correct decision making is to do the exact opposite of the herd.
This means when the you and the herd are at peak emotional states, doing what feels “right” is actually the wrong decision. Warren Buffett, Mohnish Pabrai, Peter Lynch all made a name for themselves buying companies when everyone was selling them. On the opposite spectrum, when prices rise, this is when they began getting concerned.
Warren Buffett closed his first partnership because prices were getting so high that he felt he couldn’t keep generating great returns.
You want to teach yourself to make the correct decision making when you are in emotional states. For me, this means doing nothing, thinking on the problem, then acting accordingly. Prices rising or dropping is not a valid reason to make a divestiture or acquisition.
Accept that your stocks will rise and fall at the whim of the market
As I mentioned above most people allow their emotions to determine their buy and sell decisions.
This means if your individual holdings are moving too low or too high their emotions begin clouding your judgement. Doing this handicaps your ability to succeed by constantly :
Selling potential winners when they go down in price
Lowering returns when they buy in due to FOMO
Here is what wealthy investors understand better than the herd.
Stocks are assets available to the open market. Because of this, prices will vary wildly in just a few year’s time. Since 2020 a company everyone considers a staple, AMZN 0.00 has gone up 82% and dropped 42%. This is Amazon, one of the biggest companies in the world and its price is still very volatile.
If you cannot accept that your company’s prices will vary wildly, you will not make any money investing.
What differentiates investors who actually make money from those who lose money, is the ability to maintain conviction in their holdings while prices fluctuate. Companies go through ups and downs. As a partial owner, it’s your job to determine if these ups and downs are just small blips in the overall picture.
Knowing if a blip is just noise, is a very profitable piece of information.
A small blip can easily cause a stock to drop 50% +. If you know it’s just noise:
You can buy a great company at a massive discount,
Let the blip subside,
Then profit when the market changes its mind.
If you know a blip is largely irrelevant but the market thinks otherwise, you’ll be able to make terrific profits.
Focusing on the long-term, not allowing emotion to determine decision making, and avoiding a gamblers mindset will open up a bunch of benefits:
Less risk of losing money
Ability to sleep easily at night
Make your decision and live by it.