Desperation shot (The Financial Athlete #77)

A close friend said in confidentiality, “My son is in the 8th grade. He’ll be a freshmen in college student in 5 years. So far I have only saved $10,000 for his college education. I’ll need much more than that in 5 years, so I invested this money in 2 growth companies. Although I’m down in this bear market about 25%, there’s a good chance these stocks will explode to more than triple in 5 years from my cost basis.”

I asked, “Do you think of the $10,000 as your money?”

“Yes. It is my money. I worked for it.”

“Suppose your son earned the $10,000 from washing cars and mowing lawns. If he gave you custody of the money, would you have done the same?”

With no hesitation my friend replied, “No. I would have invested it more conservatively. I’d put the money in shares of several leading companies which pay dividends and then reinvest those dividends. Of course, this would yield a much lower return than the huge potential upside with those 2 growth stocks, but it should protect the principle and beat the rate of inflation.”

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In basketball, a player shoots desperation shots for 1 of 3 reasons:

  1. the shot clock (or game clock) is running out
  2. he is trapped and has no one to pass to
  3. he has a big ego and shoots a long distance, off balance shot while defended by 2-3 players

The first 2 reasons show why a desperation shot is necessary. Only for the rare talent of someone like Kobe Bryant is the third reason justifiable.

A characteristic of bad investing is taking a “desperation shot”: if you fail the results are financially devastating but if you succeed you are “golden”. Often the odds of failure outweigh the odds of success despite your biased perception.

A bad investor make “desperation shots” for 1 or more of the following reasons:

  1. a self-imposed deadline for a high return
  2. the need for drama (including the thrill of gambling and a subconscious desire for self-sabotage)
  3. he has a big ego and thinks he possesses the uncanny ability to turn a few thousand dollars into millions within a few years.

In American culture the pressure for high performance can be daunting. To meet your own high expectations, it’s tempting to take “desperation shots”.

INVESTORS SHOULD NEVER TAKE A “DESPERATION SHOT”. To do so is the quickest way to financial ruin. As in my friend’s case above, some investors mistakenly believe a “desperation shot” is necessary. How then can an investor stop himself from investing recklessly? Think of all money as your family’s hard-earned money for which you have been entrusted to invest wisely with a long-term outlook. This money is neither “found money” or money too sacred to invest. All money is treated equally and used as a tool to incrementally improve lives.

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