What I Learned About Investing By Losing $100 Playing A Carnival Game

Hi all,

Let me briefly introduce myself. I'm a longtime user and fan of WSO, and an undergraduate student heading into investment banking. WSO has been an invaluable resource for me- as it most likely has been for most of you- and I'd like to give back a little as a Contributing Author going forward. This is my first blog post, and you can expect one every couple of weeks or so from now on. I hope you enjoy reading them as much as I'm sure I'll enjoy writing them. Any questions, comments (positive or negative), advice etc. are always welcome, and feel free to PM me also. This first post is going to be a little long, so bear with me, and if I've done my job well hopefully you'll take something valuable from it, and at the very least find it entertaining.

Today's topic covers the lessons I learned about investing by foolishly losing $100 playing a carnival game. I'll recount what happened, and then reveal what I took from it. As a budding investor, I picked up a few things that will serve me well going forward; although I already knew everything I will outline below in theory, the damage to my ego and purchasing power caused by unnecessarily losing $100 as a student on a budget hurt just enough to drive these points home. Similarly, although I won't reveal anything that is new or profound information to most of you, in publishing this I hope to embed some fundamental investing principles in a memorable and slightly amusing story that you might remember when evaluating a potential investment.

A few weeks ago, I was at an event where I was enticed to play a carnival game. A tall, rotund and partially toothless man offered me a free turn and the opportunity to win great prizes (a giant soft toy and an iPad); since I'm usually pretty good at these games (when I was fourteen I went on a school trip to Japan, and became super popular because I won so many toys I couldn't carry them home and was forced to give most of them away) I decided to play.

The game was relatively simple. It was basketball-like in nature: you had to bounce a small ball off a backboard so that it fell between that and a thin, horizontal wooden pole quite close to it. Not easy, but not extremely difficult. If you made the shot, you could keep shooting for free. Each time you missed, you had to double your bet to keep playing, starting at $2.50 for the turn after your first missed shot and increasing quickly from there. Here's where it became tempting- you could play for as long as you wanted, and when you made ten shots in total (you didn't start from zero each time you missed) you'd get all your money back, plus the giant soft toy and the iPad. To make a long story short, I made four shots before missing one, and ended up losing $100 when I missed what would have been my tenth successful shot and ran out of cash. Losing the $100 was especially painful because if I had made the shot I ended up missing, I'd have gotten my money back and won the prizes. However, I learned the following lessons that are applicable to investing (in no particular order of importance), which I hope in time will be worth more than the $100 I lost and any prizes I could have won.

1) Be Wary Of Overconfidence: When evaluating an investment, be extremely wary of overconfidence. As the legal disclaimers state, past performance is not an indicator of future performance. Although I had never played this particular game, I was confident I could make ten shots, get any money I bet back, and win the prizes offered. I believed this because I had been great at similar games in the past. Overconfidence can cause you to rush into an investment without performing the necessary due diligence (in this case, realizing I hadn't played a game like this in years and almost certainly wouldn't be as good as I once was), which can leave you stranded and annoyed with yourself when things go wrong.

2) Get A Second Opinion: This is more applicable to personal rather than professional investing, as any one person would rarely (if ever) make an investment decision independently at work. Get a second opinion! If you can have someone actively play devil's advocate, that's even better. If someone is telling you everything that's bad about an investment idea, and describing everything that could go wrong, but you are still convinced that it's a worthwhile investment, then maybe it is. However, this relates to point one above- be wary of overconfidence when considering a second opinion. A valid, opposing second opinion will do nothing for you if overconfidence clouds your analytical ability. Case in point: unfortunately, me again. My very smart girlfriend, who is ALWAYS right (does anyone else have to deal with this?) urged me to avoid playing the game, but I was sure I'd win. I would have saved my $100 if I'd listened to her at the time.

3) If Something Seems Too Good To Be True, It Probably Is: This is probably most relevant for all you value investors out there. If something sounds too good to be true, be very careful- it most likely is. I don't need to say any more than that. When the slimy game operator (who I hope also lost $100 that day, to a charity or someone who deserved the money) told me that I could win a giant soft toy and an iPad for free, it sounded too good to be true. It was.

4) Don't Throw Good Money After Bad: Another self-explanatory lesson. Economics is right when it says that you should ignore sunk costs; the money is gone, and isn't coming back- let it go. If an investment you've made goes south, don't panic and throw more money after it in the hopes that it will turn around for you. You can pray, do a dance, or consult a witchdoctor- whatever you want- but the investment isn't righting itself just because you want it to. It won't even turn itself around because you need it to. In fact, I'd argue that avoiding throwing good money after bad is especially important if you happen to be investing money you need for something else (this will be addressed independently later). As a student on a tight budget, I needed the money I was betting to cover my usual expenses, and so I started to bet more when I was losing it hoping that I would win it all back in the end because I needed it. Needless to say, I lost it all, and I won't be throwing good money after bad again.

5) Know When You Need To Ditch A Bad Investment, and GET OUT: Have a contingency plan before you enter an investment- know how and when you'll get out in case you're wrong and the investment goes bad. Know exactly how much money you're willing to lose and don't let yourself lose any more. If I had decided, before I rushed headlong into the game having convinced myself I was leaving with a giant soft toy for my girlfriend and an iPad for myself (I played the game; I'd get to keep the nicer prize) that I was going to walk away if I lost $20, my losses would have been limited to $20. I lost much more money than that because I didn't have a clear contingency plan that I would hold myself to.

6) Liquidity Is Critically Important: While I was reeling from the shock of losing $100 and running out of cash with which to keep playing (thank all gods everywhere), the ogre-like game operator (if you can't tell from my descriptions, I'm still unhappy with him although all this was technically my fault) gleefully told me that the game hadn't failed me, my wallet had. His dubious overall intelligence notwithstanding, he was absolutely right. I only needed to make one more successful shot to get my money back and win the prizes, but I ran out of cash to make any more bets with. If I could have kept playing infinitely, I'm sure I would eventually have made the all-important tenth shot and walked away extremely relieved. A lack of liquidity killed me, as it has done to many banks, investment firms and- I'm sure- people in the past. Don't get into an investment that there is a chance you won't be able to get out if you need and want to. If someone says you can buy a stake in a renewable energy company that is sure to make you ridiculously rich, but you may not be able to find a buyer if you need to sell your stake for any reason- or, if someone tells you that you can win a giant soft toy and an iPad for free by playing a game- please, for the love of God, say thank you but no thank you. Invest the money in AIG instead.

7) Think Logically, Not Emotionally: This one is important. It's easy to get carried away by emotion- excitement, stress, and other emotions release adrenaline that makes it difficult to think logically, especially in the moment. Learn to ignore the emotion and start thinking logically instead. If you're nervous about an investment because it's price has declined, but you know the fundamentals are strong, you should logically be thrilled rather than scared- ignore your emotions, and invest more at the better price. Do the opposite when logic tells you to get out but you remain emotionally invested. If I was thinking logically rather than emotionally, I'd be $100 richer today.

8) Don't Invest Money You Can't Afford To Lose: Just don't do it. It could end really, really badly.

So there you have it, those are the lessons I learned by stupidly losing $100 playing what must be (and what I should have known must be) a nearly unbeatable carnival game. There's no getting around the fact that I lost the money, and I know enough about psychology to know that the lessons I pulled from the episode are probably, more than anything, a way to justify my silliness and make me feel better about the loss. In spite of that, I will carry these lessons forward with me and I hope that $100 was a small price to pay for lessons that will prevent me from making much greater losses as an investor in the future.

If you're still reading, did this help you at all? Have you made any non-investment related mistakes that have shaped the way you invest or will invest? I'm curious to hear about them.

Until next time,

notthehospitalER

Comments (20)

Oct 24, 2013

It's great that this experience made you think so deeply about investing. Hopefully you'll get some value out of the $100, and it won't turn out to be a complete loss

Oct 25, 2013

Thanks, I think I'll be able to extract some value. It's already making me think more carefully about investing- for example, I will be earning money from a SA IB stint this December onwards (in the S.hemisphere) and am setting some aside for overseas travel. Previously, I may have invested it until I needed it for travel, but now I'm considering leaving it in a savings account untouched (don't invest money you can't afford to lose).

Oct 25, 2013

No problem, thanks for reading through it all- it was a long one. Look back for more if you enjoyed it.

Oct 25, 2013

I disagree with number 7. We're humans and we're always going to have emotions, especially when there's money on the line. The best thing you can do is learn what are the sources of a certain emotion and remember it for future cases.

Oct 25, 2013

I agree that may well be the best anyone can do because emotional responses are inevitable, however I believe (albeit after experience limited to reading about investing, virtual investing etc) that the most successful investors are often those who can let logical reasoning override emotional thinking. For example, in the book "More Money Than God" (a history of hedge funds) it outlined an example where a fund had heavily shorted something, and other investors anticipated that this fund would face a liquidity crises and have to get out, so started buying in anticipation of the price increase. The investors who were short knew this, and shorted more in spite of limited liquidity, which caused other investors to dump their holdings (because they assumed they were wrong about the liquidity crunch at this one fund) and resulted in the fund that was short making a killing.

Instead of panicking when their investment started to go south and in the face of an impending liquidity crisis, the investors running this fund reasoned that increasing their investment would change the perception in the market and work to their advantage- and it did. In this case and others, I think logical reasoning trumps emotional responses.

Oct 25, 2013

This is pretty solid. #7 is often the most difficult, especially as your position starts heading south (often I've wanted to dollar cost average down, but didn't have the balls)- more often than not it would have been a good move.

The key thing is to understand why the sudden dip and reassess the fundamentals. Most often than not it's overreaction (and while i think technical analysis is hookie pookie I'm a big fan of checking out the RSI to see a true indication of price/volume RE: to historic levels).

Oct 24, 2013

#7 can be an issue in at least two situations:
- if the whole market is going down due to temporary factors, such as a debt ceiling crisis, long term investors need to steel themselves to buy even though it feels like the wrong thing to do; and
- when an individual stock goes down as pktkid10 mentions. I find the latter easier to deal with than the former.

Oct 25, 2013

Agreed. Logically it makes sense to buy when the whole market is heading downwards, but it's tough to time the market and I'd worry about buying too early (before the bottom or near it).

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Oct 25, 2013

Agree that #7 is the hardest- it's tough to think logically when things aren't going your way. Also agree that knowing why an investment has dipped is critical. I read an interesting thought from Howard Marks that said it's hard to time the market, and that almost every investor will have an investment go against them at some point- if you are lucky/prepared, you can average down on a great investment instead of simply taking a (hopefully temporary) hit.

Best Response
Oct 25, 2013

Someone smart who was standing around watching your "show" should have funded you until you made the 10th and last shot with the requirement that they keep your hundred and the money they fronted for you to get to ten. You would have gotten the ipad and animal, essentially paying 100 for both.

My takeaway is that people need to be on the lookout for opportunities around them as there are plenty you can spot if you look hard enough. This would have been the bailout where the person bailing the other out comes out ahead.

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Oct 25, 2013
Something Creative:

Someone smart who was standing around watching your "show" should have funded you until you made the 10th and last shot with the requirement that they keep your hundred and the money they fronted for you to get to ten. You would have gotten the ipad and animal, essentially paying 100 for both.

My takeaway is that people need to be on the lookout for opportunities around them as there are plenty you can spot if you look hard enough. This would have been the bailout where the person bailing the other out comes out ahead.

My thoughts exactly. I think that your biggest loss was not finding a quick cash injection and stealing the show.

The odds are stacked such that for someone to actually win the iPad, it would take a considerable number of shots and a decent sum of money to do it. You were almost at that point.

My takeaway from the story is that you made it through the hard part and quit. See this picture for exactly what I'm thinking:

http://www.davidmcelroy.org/wp-content/uploads/201...

Oct 25, 2013

I don't think you guys take into consideration that the buy in doubles. So the person putting up the cash would need to fork out 200,400,800,1600, etc...

so i dont think most normal people will even carry more than 200 in cash these days

Oct 25, 2013

In regards to #7, "Losers Average Losers"

Oct 25, 2013

haha haven't heard that one before, like that a lot.

Oct 25, 2013

I don't understand how you lost $100.
You start with 2.50 for the first shot after a miss right? Then 5, 10, 20 etc?

Oct 25, 2013

$2.50, $5.00, $10, $20, $40, $80, $160. Then I won a consolation prize for making 9 shots and managed to "sell" it back to the game operators for $60, so overall I lost $100.

Oct 25, 2013

I liked the read, thanks for sharing

Nov 4, 2013

dude this is a classic fraud...u could have brought $100,000 and shot all day and you werent making the 10th shot. Any game at a carnival that has such a big prize is going to be rigged...there was probably a subtle change to either the hole you were shooting for or the ball itself that he could switch on when he wanted a miss and turn off when he wanted a make. If you saw someone else win the prize they were likely in on the scheme. The lesson here is not to play games that are obviously rigged.

Oct 25, 2013

Haha yeah I figured.