$400 on Big Red – am I buying a share of Apple or placing an all or nothing craps bet? The past couple months have felt like a rough night at the craps table – win lose win lose – makes you want to pull out and hit the bar! I bought my first stock and placed my first craps bet at 19. I have suffered through numerous bear markets and cold tables. Ironically, the bear markets are feeling worse thanks to our 24/7 media fear-mongers while a bad night at the craps table has gotten less painful thanks to some discipline. What do you do when a random walk down Wall Street feels more like a stagger down Las Vegas Blvd?
Get some discipline! Craps can be intimidating. People are throwing chips all over the table screaming out their bets, dice are flying, and there is a dude with a stick! And what do you bet anyway– pass, don’t pass, come, high low, hard ways, field, the numbers and what on earth is big red?
Let me walk you through my craps discipline: Before I walk into the casino, I decide how much I am willing to lose. I get my chips and place my bet on the pass line – I am betting that the shooter will throw a 7 or 11 on the come out or hit the same number twice before 7. The dice are out, shooter throws and the stick dude yells “6 easy 6”. I back my bet for the odds and buy all the other numbers. Every number the shooter rolls pays me a little dividend, and finally s/he hits the 6 and I am a winner winner chicken dinner! I get paid even money on the pass line and odds on my back bet. I slip a few chips in my purse. S/he throws a 4 and then a 7 craps. The dude with the stick clears the table and all my money. Time to head for the bar! In sum, my discipline is: diversify my bets, get paid a dividend, hold on to some winnings and never lose more than I start with.
Can my craps discipline apply to investing in the stock market? Sure!
Diversify: instead of buying 1 stock, buy them all. You don’t have to worry about any one stock not performing the way you expected, instead you reap the benefit of overall market performance plus you don’t have to work as hard on research and stress over timing the market.
Dividends: pay you cash and help offset your losses on the bad days.
Take profits: in a bull market, reduce your risk and protect your principle.
Limit your losses: before you even start investing, you and your advisor must figure out the best mix between stocks and bonds to match your appetite for risk and achieve your goals.
Seems simple enough, but why is it so hard? When the markets are roaring, everyone wants to get in on the action, like a hot crowded craps table, but when it turns cold everyone is running for the bar. Luckily the stock market is not craps – there is no guy with a stick taking all your money in a bear market – and if you stay the course and weather the storm, the markets will reward you in the long run. The key is to make sure you can tolerate the daily volatility without letting your fears and emotions drive you to make back decisions to sell low instead of buy.