Two Investment Lessons from “Squid Game”

I wasn’t really looking forward to watching the Netflix (NSDQ: NFLX) sensation “Squid Game.” It didn’t seem like my kind of program, but my wife was really keen on watching it. So, I agreed to watch it with her.

In hindsight, it still wasn’t my kind of program. However, during the second episode, I had an epiphany. I realized there were investment lessons that could be extracted from the show.

There are mild spoiler warnings ahead, so if you intend to watch it you may want to skip this. But I don’t give away anything major that you won’t find in any episode synopsis.

The first lesson is: Don’t get yourself mired hopelessly in debt.

The characters in “Squid Game” are mostly in deep debt, and that causes them to make even more bad decisions. One of the most basic rules of investing is to limit your debt. You want to be paid for the money you have. You don’t want to pay others endless interest for money to support a lifestyle you can’t afford.

Maybe you have avoided debt. The second lesson is one that applies to everyone: Don’t make gambles you can’t afford to lose.

Let’s talk about a few scenarios. What would you do for a million dollars? Would you bet your life for a coin flip? Heads you win a million dollars, and tails you lose your life?

Few people would accept such a risk. Yes, half the people in this scenario would win a million dollars, but you can’t afford that level of risk (unless you are desperate, in which case you might agree to it).

Now let’s think about a different scenario. Let’s say that over the years you have scrimped and saved your way to $100,000 in savings. Now, someone offers you the same coin flip as in the previous scenario. Heads you win a million dollars, and tails you lose your $100,000.

That might seem like a reasonable bet. You have a 50% chance to earn 10 times your money. But can you afford the downside risk? You won’t lose your life in this situation, but you might lose a lifetime of savings. If it’s not easy to replace the $100,000, you absolutely can’t afford that risk, despite the huge potential payoff.

On the other hand, if you can easily replace the $100,000, or you can place the bet several times, then this is a reasonable bet. If I can make five of those $100,000 bets, I have a 97% chance of winning at least a million dollars. That’s a good bet, but once again not if I can’t afford the loss. I still wouldn’t bet my life on a 97% chance of winning.

This may seem like logical advice, yet every day people gamble with their money. They invest in extremely risky ventures that promise fantastic payoffs, but they aren’t properly considering the downside risks.

In Squid Game, people pay the ultimate price for those gambles. But you also don’t want to bet your financial future on risky ventures. Always keep your investments in line with your risk tolerance, which needs to be related to whether you can afford the loss.

So, my reward for watching “Squid Game” is that at least it gave me an opportunity to share this investment advice.

Editor’s Note: Looking for the next outsized growth opportunity, without undue risk? An analyst with a time-proven track record for pinpointing profit catalysts before they happen is our colleague, Jim Pearce.

Perhaps you know Jim Pearce from his stewardship of our flagship publication, Personal Finance. Jim has devised sophisticated market-beating methodologies in his new trading service, Personal Finance Pro. Want to take investing to the pro level? Click here for details.