Mike: Well maybe it's time again for the thread to hear another of my shooting dice analogies.
Playing the stock market is very close to shooting dice. And I don't mean the media comparison equating gambling to stock investing. Forget that. I don't mean that at all.
It's all about the similarities of what goes on in the gambler's head and in the investor's head. Because the behaviors - responses to stimulli -- are very, very similar. We can learn a lot about how to invest from studying how people behave at the dice table. In this case, how might one behave when one KNOWS that one's money is going to be lost?
Take a long- very long- winning streak at the table. This ocurrs when numbers - 4,5,6,8,9,10 are being rolled but there's no occurrence of a 7. The money is piling up on the table - bets are getting bigger and bigger, the table is very crowded. Everyone is in a good mood. But EVERYONE knows at some time a 7 will be rolled. When this 7 shows (i.e.the shooter sevens out)all bets will be losers (except "don't pass" players who are equivalent to our short sellers)- the players (investors who are long) will lose all the money on the table. All they will have left are the chips in front of them (= our investors' cash) that they didn't bet (have invested). Some people even know that a seven shows on average once in 6 rolls of the dice, so to not see a 7 in 20 or 30, or 40 rolls of the dice is very unusual. The rareness of the occurrence though, this everybody knows. Maybe a long roll like this (Dow = 9000)might happen only once or a few times to a gambler (investor). As the roll continues, more and more numbers being made (Dow going to 9500), what are gamblers doing with their chips (money) that maybe investors ought also to be considering?
1. Some gamblers will have raised their bets early in the roll to a maximum amount they will commit. This is what the good gambling books recommend (ref: How to Win by Mike Goodman, Casino Gambling for the Winner (Stewart), Big Julie of Vegas(Linn) others.). These people will have thought through what they are going to do if that great roll occurs while they are at the table.
That would mean for an investor (who has more time to think about what's happening) - no increasing investments - new 401k money goes to cash or equiv., no increase in margin, or throwing money into stocks greater in amounts that was done in '97 or maybe '96. No making wild-eyed investments (like getting sucked into poor bets only because they seem to be paying off.)
The idea is that as the numbers roll in, the winnings are withdrawn. It's the amount of chips in front of you not played that count now --- because the amounts on the table will be history. The good gambler (investor) will always have cash to play another day. The purpose is to make and keep an adequate but optimized return. The intent is not to break the casino bank (which I equate to trying to make Wade Cook change-your-life investments -g-).
2. Some people will reduce the amounts of their bets. A maybe obvious choice given that we KNOW a 7 will show and all wagers will be lost. Not a tactic used by good gamblers or good stock (value) players though IMO. Because dice have no memory - numbers can go on and on, the market can go higher and higher, and you want (I think, my opinion) to be in a position to capture gains while you can. Reducing the absolute amount played (invested) is a retreat and loss of the courage it took to get to the betting (investing) level that was achieved, IMO.
3. A very,very few people will start to make offset bets (start to go short)- after all... a 7 MUST show. These people IMO either seem to bet against themselves or worse, fail to make any kind of worthwhile return on their bets (shorting detracts from profiting from going long). Also, this is not a tactic recommended by any gambling book with which I am familiar, nor is it recommended by any classic investing book (Buffett/Graham/Fisher) I believe.
In any case, no experienced gambler will gather his/her chips in the middle of the roll and just walk away (Go from 100+% invested to 0%). Not to cash out, and certainly not to start at another game. The events occurring at the winning dice table (Dow 9500)are too rare to be ignored or to be dismissed so readily.
Especially as everyone else is screaming to get in on the action -g-.
My own investing pattern right now mirrors my own gambling pattern on these long rolls. I'm long stocks and long cash. I generally am increasing my investments but at a smaller and smaller rate. Currently I have more money invested than I ever have. But I always try to take some and play some. Although my cash is at its lowest % level in several years, the absolute amount is at the high range.
FWIW, Paul. |
