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