This is the first in a seven part Las Vegas themed series, “What Las Vegas Can Teach You About Your Personal Finances”. In case you did not know, this week’s posts are brought to you directly from Las Vegas, Nevada where I am, like everyone else who comes to the glittering city in the desert, currently on a mission to maximize my investment and minimize my losses on the felt.
You should only gamble on casino games in Las Vegas that you know well. My game of choice is blackjack. I have had a lot of practice playing it, and I know the game’s rules and basic strategy inside and out. I did make the mistake the first night that my wife and I were in Las Vegas of craps. Do not get me wrong, craps is a great game. It is incredibly exciting, but I am not very good at it. I quickly lost $200 within two hours of playing. Not a very good return on my investment to say the least. So, I decided to cut my losses and switch to blackjack, and I started to win again and eventually made back my losses after a few hours of playing.
The same principle can be applied to your finances. You should only invest in the stocks of companies that you know very well. You should only invest in companies and the investment products that you understand backwards and forwards. If you cannot tell your friend over dinner why you bought an investment and why you think it is going higher, then you are in the wrong investment product. The world’s greatest investor, Warren Buffett, famously sat out of the technology bubble in 2000 because he said that he did not understand the companies and their business models. What sense does it make to buy shares in a company that burns through cash with no real clue as to how it will become profitable? The same can be said for my craps experience. Why continue to plow good money after bad money into a game that I obviously do not understand or play well? No matter how much fun the game may be, it will not be that way for long if you continue to lose money. The same is true for stocks. It does not matter how much I love Pets.com if I cannot make any money by investing in the company.
The hardest part is recognizing the problem and getting out. The hardest part for an artist is to understand when to stop drawing his picture. The optimal solution is to know you stopping point before you start and to not wedge yourself into a corner that you cannot get out of to begin with. Know what you do well. Do not invest in things you do not know well without properly educating yourself. How many of your friends do you know that are considering investing in gold, options, or currency despite not knowing the details of how those investments work?
This is the first post of a seven part series of what Las Vegas can teach us all about personal finance. Check out the others in the series below…
- Post #1 – Invest In What You Know
- Post #2 – You Need Perseverance
- Post #3 – Know The Rules Before You Start
- Post #4 – Do Not Watch Your Bankroll (The Market)
- Post #5 – Know Your Risk Tolerance and When To Stop
- Post #6 – Do Not Gamble More Than You Can Lose
- Post #7 – Know When You Are In Over Your Head
Just to be clear….in no way am I advocating gambling. If you think that you may have a gambling problem, you should find help as soon as you can. There is help available. You can find help and resources at the Gambler’s Anonymous website, the National Council on Problem Gambling, and the National Center of Responsible Gaming.