InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

Collect this extra money immediately!

Collect this extra money immediately!This unique income-boosting opportunity allows you to collect up to $1,003 a month in extra government cash. This plan is available to everyone over the age of 18. And because of the way the government views the money that comes from it, your current—or future—Social Security benefits won’t be affected. There’s still time to get your name on the next check run. I’ll show you how here.

 

What A Gambler Taught Me About Understanding Risk

By Robert Rapier on December 5, 2017

Years ago, I worked for a man who liked to gamble on NFL football games. He put down thousands of dollars on games every week, but I watched him make logical errors that are often made by stock market investors. 

Most notably was his failure to appropriately recognize risk and reward — a common issue with gamblers. He would rationalize that he almost went the other way on the bet, which tended to downplay his risks.

He would bet more than he could afford to lose, which sometimes worked out. But in the long run, it didn’t. Eventually, if you take those kinds of risks, you lose. 

How Random Chance Can Fool You

My boss would pay for hot picks from “experts.” At one point, I recognized that he was probably falling prey to scams that work something like this.

A “guru” with a “system” sends out letters to 1,000 known gamblers. He gives his “Lock of the Week” on a particular NFL game. The heart of the scam is that he picks one team to win in 500 of the letters, and the opposite team in the other 500.

The next week, he repeats the process only with the 500 people who received the correct pick the week before. At the conclusion of the second week, 250 people have received an accurate pick.

The third week, the guru begins to heavily promote a paid service, while giving a final “Lock.” After the third week, 125 gamblers have seen the service accurately pick three straight football games.

Confusing Luck With Skill

A gambler may reason that the odds of accurately picking three straight games are low (12.5%), so perhaps this guru indeed has an edge. The appearance of success makes it far more likely that the gambler will cough up money to get next week’s pick.

What is the fallacy here? Gamblers have been presented a selective picture, which leads them to believe the odds of success are higher than they are. They were conned into believing blind luck was a result of skill.

This is a common mistake made by investors as well. We invest based on what we believe is a clear picture of the data. Then there is a profit warning or product recall — and we realize that our picture was incomplete.

Or, we invest based on previous accurate predictions of a “guru.” But it may be that the accurate predictions were purely a result of luck.  

The Bingo Fallacy

Then there is the fallacy that I call the “bingo fallacy.” In the game of bingo, you fill out a card based on a combination of numbers and letters. You win when you spell out “B-I-N-G-O.” 

As the game progresses, random combinations are called out, and someone eventually wins. You look at your partially-filled card and see that you were only one letter away from winning. Perhaps you even had two or three combinations that were just one letter away from winning.

In this case, it’s easy to overestimate your chances of winning. It looks close, but there were probably others in the room even closer to winning than you. Had the game continued, there could have been 20 other winners before your number was called — even though it looked like you were on the cusp. 

Investors fool themselves all the time with these sorts of fallacies. They may overestimate their chance of winning in risky situations.

The Lesson

Lately, I have seen many do just that with the bitcoin phenomenon. Many people are kicking themselves, asking why they didn’t just allocate a few dollars to bitcoin. After all, the potential reward from a token investment could have been enormous. 

In July 2010, shortly after the first bitcoin transaction, the price of one bitcoin was $0.008. For $100, you could have bought 12,500 bitcoin.

Last week the price per bitcoin surpassed $11,000. That $100 investment in 2010 could have grown to $137.5 million. (Note: Original had a math error that has been corrected). 

If you are questioning yourself for missing out on this investment return of a lifetime, you may be committing the bingo fallacy. It may seem your odds of success were higher than they were.

Consider that when bitcoin was first introduced, there may have been a million highly speculative investment opportunities vying for your dollars. Most of these would have been merely money down the drain. It is only with the perfect vision of hindsight that it seems like you were “this close” to cashing in, “if only” you had allocated a few dollars. 

And many who are now buying bitcoin are like my former boss who liked to gamble. They don’t necessarily understand the investment risks, and they may not have enough information to make an informed investment decision.

People see stories about investors getting rich with bitcoin and believe this is more common than it is. They see the “guru” on a win streak and assume it is indicative of future performance. 

Conclusions

My intent here is not to convince you that bitcoin is a bad idea. I do think it is a speculative bubble that is bound to burst, but I can’t say that I understand it well enough to provide informed advice.

Instead, I want to convey to investors that the risks are high, and you should understand them. Recognize if you are falling victim to one of the logical fallacies I have described today, and only invest if you are sure you understand the risks and can afford to lose your investment. 


You might also enjoy…

 

12 Stocks Virtually Guaranteed to Go Up in 2018

You may not believe it, but I have a calendar in my hands right now that tells me the exact date and time when a few stock are practically guaranteed to go up. 

Twelve of them, in fact.

And if you were to invest in them following the simple buy and sell instructions found in this calendar…

You could be making $1,181… $11,814…. and as much as $190,916 more than by using a “buy-and-hold” strategy.

And here’s the best part…

I’m giving away a few copies of this calendar to interested investors (First come, first served).

With this calendar, you could get higher profits with less risk.

Click here to get the full story, and to claim your copy.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.