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The Easy Money Trap

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May 10, 2011 – Comments (5)

Board: Investing Beginners

Author: jackcrow

 

I'm probably tip toeing in the tulips by myself with this next idea, I hope I present it well.

There are gamblers of every size and shape. They gamble at Native American casinos, they gamble on river boats, in Atlantic City, Reno and of course Las Vegas. Most gamblers lose money, it is how the house can afford to buy you a $10 prime rib all you can eat buffet. Most gamblers know they are going to lose money; they came to PLAY.

If you watch ESPN from time to time you get introduced to a completely different type of gambler, the professional. In truth not all pros work the tourneys for lights, cameras and bracelets. What is consistent among the pros is their level of knowledge and skill. They are not gambling junkies looking for a fix nor are they lucky. They know how to play the game so that they profit over the long haul. They know how much money they need to sit down at a table or get invited to a private room. The amount of money they need has nothing to do with entry cash it has everything to do with how much they need to stay in the game long enough to win the big hands.

Pro gamblers are grinders, they wait and wait for the right hand to come their way. The little pots are ways to mark time while they wait. It does not matter if they win or lose the little pots because that is not how they pay their rent. After hours of grinding small pots the right hand gets dealt and they play the table with skill, BAM!, in one hand the rent is paid. Pro gamblers do not gamble, they work the odds and they work the table.

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Investing is not gambling and gambling is not investing. People are people and people behave around money in pretty consistent ways. One constant is that people dream of easy money. They dream of pulling the lever and winning a car, scratching a ticket and wining 50k, the pretty lady pulls the right ping-pong balls and poof they are millionaires. Part of the fun of a casino is the same kind of fun we get by going to the theater or a movie, we suspend our practicality for a while so we can enjoy the fantasy. Each pull of a lever, each bet at a table is fun because we COULD win BIG. Most of us leave with less cash in our pocket then we had when we walked in and we knew that was the most likely outcome, for the 2-3 hours we were there it just didn't matter because it was fun.

Here is the rub, the unfortunate truth, the dream of easy money pervades the entire investing realm. The industry uses it to convince people to give them their money. People convince themselves they don't need to do the hard part and they will get rich anyway. Many do-it-yourself-er investors have read piles of the industry's propaganda about how markets work and how easily they can capture that easy money. These folks then read "Investing-for-morons" and "All-you-need-to-know" books and decide they can do it too. They are right they can do it, but they can't do it the same lazy way that is being advertised in the pretty pamphlets laid out on the pretty tables down at the bank.

The biggest mistake made by most investors, young, old, novice, veteran is the easy money trap. "All I need to do is X". Seriously, if that was true, then all the boomers and Gen X'rs would have had their houses bought and paid for and we would not have had a financial melt down. If it is that easy everyone would do it, we would all be living in Lake Wobegon with our beautiful spouses and surrounded by our above average children.

Fishing is fun and its not hard to do. If you want to eat every day fishing has to be worked at. It can still be fun.

Gambling is fun and it is not hard to do. If you want to eat every day it has to be worked at. It can still be fun.

Investing is fun and its not hard to do. If you want to eat every day it has to be worked at. It can still be fun.

Show me a lake with Kokanee salmon and at the end of the summer I'll show you a freezer full of salmon fillets. Show me a stream with trout and grayling and I'll have tons of fun and eat most days but winter will be filled with beans.

I'm not callous or patient enough to grind gambling for a living nor do I like being food for the predators higher up on the food chain. I'll play the wheel if I have enough of a stake to hang in for a while, if not I'll play the quarter machines for bells and giggles.

Investing is a part time gig, a serious hobby. I put my time in and I work my methods. If the methods are not panning out this month/quarter I wait, because they will. I hold no fantasy that I will be the next whomever or that I will turn my tiny stake into a private island. Me and my money put on our hard hats and grab our lunch buckets and we head off to work, we punch our clock and we get paid; most days we enjoy our work.

Most people will not be better off DCA'ing into an index, not because its a poor method but because they do it for the wrong reasons. People DCA into an index because of the easy money trap. People chase pennies or rocket stocks because of the easy money trap. If your investing/business plan looks or sounds like the pretty pamphlets and letters the pros send you I'm willing to guarantee below average results. If your method or business model involves "All I need to do is . . ." or "All I need is the right _____" I'm willing to guarantee below average long run returns. A crummy business plan is going to create a crummy business.

It does not matter if you use ETFs, Index funds, stocks, bonds, CEFs or managed funds. Your results will be founded not on the assets chosen and deployed but on the thought, management and effort put into working your assets and your methods. As odd as it may sound you can successfully DCA into an index when it is done with thought, consistency and you are willing to adapt as times change. You can also throw money away by thoughtlessly DCA'ing without consideration to you, your needs and market conditions. DCA'ing works, until it doesn't if you respect that and adapt to it you can do better than the average bear. If you think it works just because it does then I'm willing to bet the market will teach you a nasty lesson in due time, refuse to learn the lesson and the market will roll you again and again.

I'm a value investor and if I am not careful I will buy a bunch of safe do nothing value trap investments. Anyone can buy "value stocks" or "value funds" not everyone in the game is consistently making money. I am willing to bet the one's that are making money put in the time and effort to separate cheap from value.

I know Charlie and Quill put their screen time in each week to work their methods and they both get paid for their time. If you ask them they will spell out their potential pit falls and traps they need to dodge.

If you really want to invest, use the mirror and look yourself dead in the eye and don't move from that mirror until both of you are convinced that the easy money dream is on the shelf.

jack

5 Comments – Post Your Own

#1) On May 10, 2011 at 10:30 AM, miteycasey (30.62) wrote:

yep

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#2) On May 10, 2011 at 6:44 PM, Sassy67 (< 20) wrote:

Sure doesn't feel like EASY money to me!! I've been studying trading since the middle of Nov, 10. I started from kindergarden, having never had any exposure to trading or the stock market!! Didn't know the Lingo at all!! I'd say it's been a pretty steep learning curve, frankly. Maybe I'm in first grade now, finally. I admit I'm a math-challenged female, so you know I'm starting in the back of the mostly male dominated world of trading. But it's been a very interesting and challenging class!! So far, I've made a little money, no big huge losses, fortunately. I want to understand the process--that's my goal!! How do this thingy work, anyway, is always my goal. Fortunately, I am retired (so I have time to study it all day) and my husband is a CFO so he helps me a bit with all the information on companies--the difference between the bottom line and the top line. BTW, I am retired from being a Relationship Therapist, right brain stuff, not left brain stuff. My husband and I used to connect by talking about our relationship, now we connect by talking about the market, options, and trading. Got to admit it's even more fun!!

Thanks for your article!!

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#3) On May 10, 2011 at 11:07 PM, jackcrow (84.50) wrote:

Sassy,

 Stop by the beginners board and ask away. There are a few of us who check there frequently. Good conversations arise that help all of us explore

http://boards.fool.com/investing-beginners-112963.aspx?mid=29291326

 You might want to read Fishers Common Stocks and Uncommon Profits. It might fit your people persone brain. There is an art and intuitiveness to investing successfully. Everyone can see the same chart, everyone can crunch the same numbers. The trick is fitting that information into your world so it makes sense and profits. I will pass on 100's of stocks that other people will use to make money. Others will pass on the very same stocks I use to build wealth. 

 Happy to be helpful

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#4) On May 13, 2011 at 12:11 PM, SultanOfSwing (97.38) wrote:

I like fishing, gambling, and investing.  So of course, +1 rec for you.  Gambling is by far the hardest of the three to succeed in, so I gave that up years ago - aside from the occasional lottery ticket.

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#5) On May 15, 2011 at 8:37 AM, buffalonate (94.22) wrote:

I read Peter Lynch's One Up On Wallstreet and the Motley Fool's Guide to Investing years ago.  I can now say that beating the market is very easy because I know what I am doing.  It's not only about finding great companies.  It's about being patient enough to buy the great company at the right price. 

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