This rule is actually a bit more complicated than some of the others.
First, I need to define what I mean by “bad deals”. I’ll start with myself. You need to know that I’m quite conservative. I save money. I have money markets, CDs, savings accounts. Interest rates are low right now. It’s a BAD DEAL.
Other people invest differently. Some people buy gold. Some people who buy gold think that gold is being manipulated to the downside. There is an entire internet culture of conspiracy theorists who spin tales around gold. If the price of gold is being “suppressed” as they say then for them it’s their own personal BAD DEAL.
Then there’s gambling. All investing, whether we like it or not, has an element of gambling about it. Some people complain about the odds. The house always wins. Just once, they’d like to pull the lever and walk away a winner. They don’t. They just complain because it’s a BAD DEAL.
Complaining about bad deals is actually a complex, maladaptive sort of pattern. It goes like this: 1. You have a preconceived view of how the world ought to work. 2. The world doesn’t work the way you think it should. 3. You complain about that. 4. You feed your own frustration and anger. 5. You try to get others frustrated and angry. 6. You get more and more angry if they don’t agree with you. 7. In extreme cases, this can lead to criminal behavior.
There are a number of alternatives along this path, places where you can branch off before you become criminally insane. That’s the “Instead…” part of this rule. I wasn’t going to put that in the title; but I thought it was too important to leave out. You can’t just tell people not to do something. You need to offer an alternative. Now, this is not the only alternative; but when it comes to investing I believe it’s the most imporant. What is it?
FIGURE OUT HOW TO GET ON THE OTHER SIDE OF THE DEAL!!!
Oh, man. How many people never make that leap of logic? Let’s go back to the three examples.
First, my own personal case. Lots of money in a savings account earning diddly-squat interest. I could join the chorus of Federal Reserve bashers, or I could take on some risk in the stock market. I had “cash on the sidelines” in my trading account, and that’s what got me back to break even (in fact, as of this writing I’m in the black a little). At this point, I feel like I have enough in the market. Yes, I’d like to see my cash investments earning more; but I’m not complaining. The returns I’m giving up are paying for the peace of mind that comes from knowing the investments are insured and will not decrease. There is no point in complaining about the low interest rates. I can’t change them. Even if I joined some kind of political movement that had “Make the Fed raise rates” as its objective, it would probably never change anything. Not only would I be out the lost interest, I’d be out my time and whatever money I gave to the organization. Not worth it. No point getting angry. It’s a bad deal, but I DON’T COMPLAIN ABOUT BAD DEALS. I either get on the other side, or if I can’t get on the other side, or have already put enough money on the other side, then I stop thinking about it. At least, I stop thinking about it until it’s time to rebalance the portfolio. The point is not to take bad deals lying down. It’s to do the best you can with a bad deal, and then move on with life.
OK, next the goldbugs. Many of these guys are classic complainers. They actually do have a political movement, led by Ron Paul and a host of newsletter guys. Let’s throw in Peter Schiff, Alex Jones, and that wierd New Age guy who made that movie Zeitgeist. These guys want to abolish the Fed and replace it with a gold standard. As you might be able to tell from the tone of my writing, I think this would be the bonehead move of the century. In fact, I do my own share of complaining about what idiots these guys are, and I admit that I have my own little unhealthy problem with this. I know that I can’t change their opinions. However, the mere fact that people were out there saying so much about gold got me thinking. What did I do? I traded in and out of gold on the way up. I never had a huge chunk of my portfolio in gold. I’m not, and never will be a “True Believer” in precious metal investments for the long term. You see what I did though? There was all this interest in the metal, a bunch of people who are advocating something that I believe would be a disaster for the economy. Yes, I complained; but then I said, “maybe they have a point, but even if they don’t a lot of people are following them and that will cause their investments to rise”. I GOT ON THE OTHER SIDE OF THE DEAL. I consider it only a partial victory though, because I still complain about these people sometimes.
Finally, there’s gambling. A lot of people gamble. Everybody knows the odds favor the house. That’s the first thought. A natural second thought is, “which games are least stacked against me?”. Plenty of gamblers make this leap. The next leap, the one that many fail to make (by now you should be able to guess) is, HOW CAN I BECOME THE HOUSE? Yes. Call me what you will, but the dumb money goes to Vegas. The smart money is running stock screens to see which gaming companies are the best buy. Smarter yet, you can ask yourself what the worst possible game is, and how to get on the other side of it. The lottery is commonly cited as the game with the worst odds. It’s run by the government, so you’d think you couldn’t get on the other side. Au contraire! Now you have to make even more leaps. Learn about the lottery. Where does the money go? Did you know that the convenience stores get a cut of the winnings in many states? Some lotteries earmark funds for specific purposes, such as education. When lotteries were first passed in many states, a lot of people probably wanted to know what the odds were on the tickets. There were probably fewer people asking where the money would go, and how it would transfer from public into private hands. Government money tends to find its way into private hands. Performing such an analysis may or may not have led you to any investing opportunities. The market may have performed this analysis before you did, and priced lottery revenues into the share prices of convenience store operators or educational providers. Performing the analysis would still have been useful. It’s a good exercise.
These are just a few examples. I’ve also applied this way of thinking to options recently. You say that put is too expensive? I say it’s not expensive enough! You see a bad deal? Don’t complain about bad deals. Instead… get on the other side.
Just one final note, which really ought to go without saying. There are some bad deals you don’t want to get on the other side of. If International Baby Mulcher takes your offspring, owning stock in it will probably not assuage your grief. In other words, you don’t want to invest in something that goes so radicly against your beliefs that you start to feel guilty. Your beliefs may change, but they shouldn’t change for the sake of earning money.
Nice post! GA is also my biggest earning. However, it’s not a much.
Hey, I really enjoy your blog. I have a blog too in a totally unrelated field (Online Stock Trading) but I like to check in here on a regular basis, just to see what’s going on and it’s always interesting to say the least. It’s always entertaining what people have to say.