Our minds are sneaky devils, often playing tricks on us. They can be small, harmless pranks, such as when we see mirages in a desert. Or they can have massive ramifications, such as when we allow our emotions to get in the way of our money management.
In a recent Psychology Today article, Dr. Nando Pelusi reviewed some ways that we lose money when we have a gambling mentality (which many of us do, even if we never step foot in Las Vegas). Here are some of his recommendations, with my own comments added:
Beware of the tendency to tell yourself that you must recoup your losses. This drags you further into the hole and perpetuates the obsessive aspect of gambling.
This one hits home with me, since I know I've done it myself with stocks and have talked to plenty of others who have as well. Imagine, for example, that you've lost three thousand dollars on Martha Stewart Omnimedia (NYSE:MSO) stock. (I myself lost money on this stock a while back.) You'd obviously like to get that money back -- and you have some choices. You can hang on, hoping that Martha's new foray into upscale offerings at Federated's (NYSE:FD) Macy's chain next year will pay off and boost the stock considerably (noting that this doesn't seem like a terrific development for Sears Holdings (NASDAQ:SHLD) or Martha's relationship with Sears). But if you don't have great faith in this development, you might be better off looking elsewhere. You can make up that $3,000 somewhere else, in some other stock.
Argue with the instinct that you can beat the system. Remind yourself of the statistical realities.
Right on, again. Too often we chase pipe dreams, hoping that some stock we read an exciting paragraph about will zoom to the moon for us. Could it happen? Sure. Will it happen? The odds are rather remote. Another statistical reality is that you have a good chance of earning market-beating returns by investing in carefully selected, undervalued securities -- perhaps ones that even pay out hefty dividends.
We at the Fool think dividends are really worth adding to your portfolio. In fact, our Motley Fool Income Investor newsletter specializes in stocks with fantastic dividends. Last time I checked, more than 20 of its picks sported yields above 5%. In just a few months, recommended firm Agree Realty (NYSE:ADC) is up 15%, with a dividend yield near 6%. Meanwhile, energy concern ONEOK (NYSE:OKE) is up more than 17% and has a yield north of 3%. Take a sneak peak at Income Investorfor free and see all its stock recommendations (which are beating the market 17% vs. 13%).
Place restrictions on your wagering before you get sucked in. The rush you get from gambling is fun and often legal, but beware of your judgment while in the zone. Leave your credit card in a safe place and do not let it into the casino.
This is good advice, too. Some people go all out when investing, doing so with borrowed money (by investing "on margin"). Margin can amplify your gains, but it will also amplify your losses, and can you really afford that?
Investing, not speculating
Your risk instinct generally operates below the level of conscious awareness. Make your self-talk about the fun of gambling conscious. That way you control the gambling, rather than the other way around.
This talk about gambling is relevant, because when we buy and sell stocks and funds without having done much research, we're really gambling, not investing.
Are you perhaps invested in Kohl's (NYSE:KSS) because you like shopping there? That's not good enough. Are you aware of how the company has been faring lately? As Jeremy MacNealy recently reported, new brand and marketing initiatives are drawing new customers to the stores, with transactions for the quarter up 4.8% and transaction value up 2.1% year over year. New store openings helped push sales up by 16% in the last quarter, operating margins were 8.9% versus 7.9% a year ago, and net income surged 34%. Knowing these kinds of things can help you justify sticking with or dumping a stock, and can help you keep an eye on the firm for any signs of slippage.
Did you invest in Cisco Systems (NASDAQ:CSCO) a few months ago because its price was around half of where it was several years ago and you figured it must be a bargain? Again, that's not good enough. It might have been overvalued both then and now. You were operating on hope and greed, not on rational analysis. Fool contributor Anders Bylund has given a lot of thought to the company, recently noting that Cisco might be able to capitalize on the growing video-on-demand (VOD) revolution as it moves into our living rooms.
Don't rely on the sneaky, subconscious parts of your brain when you make financial decisions. Instead, use more of that gray matter to study your options and to carefully decide when to buy and sell.
You can learn more about the power of dividends in these articles:
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Selena Maranjian 's favorite discussion boards include Book Club , The Eclectic Library, Television Banter, and Card & Board Games. She owns shares of no company mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
