Casino and Stock Market Participants
I am writing this article because after 14+ years of investing, for the first time I feel like i'm in a FIFO crowd (explained below). I bought in to Facebook at $19 and rode it out to $70+ today. This is my exit before the herd also leaves. Am I leaving early, very likely. Am I going to be annoyed when Facebook hits $90, probably. But being able to dictate to the market my belief and be able to walk away is an amazing feeling and having a 3.5 bagger (350% return) is not a bad time to walk away.
Market is like a casino
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Ever walked away from a casino happy that you came? How many times have you won? lost? I am willing to bet you think you have won more than you have and in-fact most of us have lost money in aggregate. A few painful events at the casino and we tell ourselves
ok this time i'm going to spend $100 and if lose it I walk away (100% lose) or If I am up anything more than $100, I walk (100% return).
We set these boundaries because we know our pain tolerance of losing money, but we rarely know when to walk away, even when we have triggered the 100% return threshold. Stock market reminds me of a casino where losers are abundant and winners far and few. Three personalities which come to mind, two are long term losers and only one a winner. I am going to use accounting vocabulary to help explain each personality. In accounting inventory can be managed in many ways as long as you are consistent.
LIFO - Last in first out FIFO - First in first out LILO - Last in last out
Market participants
Beginners luck - LIFO - This is the person who came in pretty late to a stock (last in), has caught the trend and is also going to be selling very soon (first out). It's this person's first real whiff of the market and the candy sure tastes good. Next time around he is going to lose more than his total payout this last go. He's the guy that is jumping around at the casino because he won.
Seasoned winner - FIFO - This person has been invested in the market for a long time (first in) and knows clearly his triggers to walk away (first out). He has set clear limits and has the discipline to execute on his beliefs. He is rarely persuaded by marketing hypes of CNBC and Bloomberg. He makes his own choices. The beginner previously mentioned just caught wind of this FIFO crowd and made money as well. This is the quiet, calm guy who just hangs out with a Scott glass and a big pile of money at a table.
Seasoned loser - LILO - This person knows the markets but chases trends, buys IPO's on the secondary market, listens to Cramer for advice on the latest stock to purchase. He get's in late on the stock price and perhaps the stock goes up and he is happy but he doesn't know when to exit. He has never setup an exit strategy. He doesn't know when to walk away from the casino even when the FIFO dude is packing up. The stock crashes and he is furious and says
"I should have sold when it was higher".
Takeaway from this article
I watched a SEAL's documentary in which one of the SEAL's said, "we never walk into an arena in which we haven't already planned our exit".
Don't be a LILO. Always know when you need to sell even before you buy.