Why Doing This Well Will Have You Making Money Until You Die
November 04, 2010
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Why Doing This Well Will Have You Making Money Until You Die by mikecart1
So what is this? Well instead of talking a bunch of filler in order for you to read the entire article like some authors we know, I will come out and say it in the 2nd sentence: bankroll management.
Having an early history of poor bankroll management and having failed early in my life, I have realized far sooner than many average investors the power of bankroll management. Now you can read all the articles you want on what stock is hot or which one is not. You can read all about the dividend plays and when to enter the market or to do blah blah blah. But without proper bankroll management, you are only setting yourself up to fail and sometimes lose the game for good.
I used to play poker pretty seriously for several years during the Moneymaker Boom. Poker players know what I mean with that phrase. Anyways, the most important thing about poker in my opinion is bankroll management. It has little to do with knowing what to do with the cards, all the pot odds, and all that stuff. Just like in investing, we all know the end goal: win and make money. I mean the entire teaching of millions of investors and poker players is a complete waste if these people don't know how to manage their bankroll! Bad poker players will usually make the least amount of money on good hands and lose the most amount of money on bad hands. With investing, things aren't much different.
Now to the point. I see it all the time. I don't even need to see it all the time. I hear it too. You hear it too. "Investors losing it all during xyz crash". "Investors going bankrupt after the bubble burst". Why are these things even happening anyways? You have to be naive to think the market will always go up. You have to be even more naive to think the market will never crash or drop unexpectedly. We are living in reality afterall, right? This has nothing to do with timing, it has to do with bankroll management.
Here is an example I find all the time that make absolutely no sense:
1) Entering a stock with a number of shares/dollar value that you can't afford to lose AND you can't average down several times over with no loss in sleep. I mean come on guys! This is like that poker player that is playing with a bankroll and at stakes they can't afford to lose. Why are people entering stocks (no matter what the stock is, no matter how good it might be) with so much money on the line? They are leaving themselves with no way out. Averaging down is powerful and I have used it a lot to get out in the green over 95% of the time.
So about those bubble bursts, crashes, and bear markets. I love how there are so many descriptions of these but so few people pay attention. If you had bankroll management during the dot-coms for example, you could have easily gotten out of many of the stocks with no issues. But in reality, many people were chasing the next "microsofts". And for what? These people went all-in, something in poker you rarely should do, even if you have the nuts. It just doesn't work long-term for your bankroll management!
In the recent recession, or current one, if you don't believe the lies on TV and the media, many people lost a lot on banks and blue chip stocks. I'm willing to bet those that lost had so much of their available cash assets in the stocks, that they left themselves with absolutely no way out. Their best and ONLY bet for many of them is to wait until the market reaches back to where it was. All this waiting is doing nothing and it is actually doing a big negative to your bankroll management. Since you have these stocks you are waiting to break even, many people had no available money to invest in broken stocks but solid companies. They didn't even have money to play the spec plays that could have changed their lives completely. This is similar to those with bad bankroll management in a $5/10 NL game and the person only has $1000 total to bring to the casino. In a $5/10 NL game, usually you can buy a maximum of 100 big blinds. In this case, $1000 is the max starting you can bring. So if you are only holding $1000 and buying into this game. As soon as you go under $1000 in chips, you can't buy back in. When you finally get the cards you want, you may be penalyzing yourself without even knowing it since you can't get the maximum reward for your hand.
In investing, you should be going for maximum reward, but not if it costs you to lose on potential future opportunities. So next time, when you are thinking about going "all-in" on that "awesome" speculative stock or historically low stock, that you just "know" is going to return to greatness, save a little cash on the side, keep your options open, and use good bankroll management. You might be surprised at how saving that extra cash will help you create a ton more in the future.
Cheers!
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