Poker, Sharks and Lunch - Keep Some Powder Dry and Learn How to Swim with the Sharks
The First Rule of Poker Applies to Investing
I used to play some very low stake poker at times and later learned how to play the game for serious money from my wise old father in law, Art. He loved to play and after explaining how to watch for tells, avoid letting my emotions get the better of me, and understanding the odds for any given situation, offered me this advice:
He said, “you can make some good money if you get into the right kind of game but you can also lose your entire bankroll if you don’t understand this most basic reality: Look around the table, and try to identify the fish for tonight. If you can’t tell who it is, then it is you and you are better to pack up your belongings and head for the door.”
In the grand scheme of things, I was still not playing for that much money - my family would still eat tomorrow if I lost my entire stake for the night. I would heed his advice to a point but because these were usually “friendly games,” and I often rode with someone else, it was impractical to head for the exits. What I could do, however, is limit my betting and opt out of hands where the pots would cost more than I was prepared to lose.
Reading the Crowd, Opting Out and Controlling Your Emotions
The same rules apply for newbie investors and actually for any investors who are working with more than just lunch money. When your family's future is on the line, it is best to know the rules of the game. Understand the odds of each situation you encounter and make sure you are not the fish when there is serious money involved.
When the crowd is “all in” and you are sitting on the sidelines, it is very tempting to jump in with both feet. The kind of runaway bull market we are experiencing right now is taking money from all comers, but the smart money is already heading for the exits. They know this cannot go on forever and have already moved most of their money out of the market.
The fundamental advice to buy low and sell high is virtually impossible when nearly every stock and every sector is overpriced. Searching for bargains in the high end of the market is a fool’s game at best. Even if this market continues for a few more months, your odds of making any decent return diminish exponentially. Wait for the correction and then come back in carefully.
Bide Your Time and Avoid Leading with Your Chin
Use this time to plan your strategy and do your homework. Seasoned investors call it “keeping your powder dry.” Watch the overall market carefully and understand how geo political and macro-economic factors affect the overall market, sectors, and even individual stocks. At this point, there is no “blood in the water,” except maybe your own if you dive into an overheated market. The water is boiling and you will be burned. I almost guarantee it. Resist becoming a fish and move onto safer waters for now.
Watch for Signs and Read the Tea Leaves
Much like sharks circling at the first sight of blood, there will be obvious signs for you to “put a toe in the water.” As much as the events that cause market downturns are often emotionally disturbing, the smart money knows these are the times to be going into a market, not coming out. A catastrophic terrorist event may cause the first downturn, or the debt crisis in Greece may spread to other European countries and beyond.
There may an over-reaction to the debts piled up by oil companies and their lenders betting that $100 per barrel would always be the norm. Or, it could come from the negative effects of the U.S. currency recovery (U.S. companies working in foreign countries are losing money on the exchange rate, exporters are being hit hard and local economies that depend on foreign dollars are seeing significant declines at the cash register.
What’s for Lunch? Swim with the Sharks and you will know!
When you are firmly convinced that you are not lunch but are in a position to eat someone else’s, it’s time to start circling the waters. There will be plenty of people looking to get out and your best move is to exercise a high level of patience. Wait for the “blood in the water.”
There again, will be plenty of signs. “Everyone” will be talking about the market and how much money he or she lost. If you were around for Black Monday or the financial crisis in 2008 this is “déjà vu all over again.” Buying opportunities will present themselves and your mission becomes sorting them all out and choosing the best ones for your situation.
Plan Now for the Inevitable Downturn
That’s why it is so important to do your homework now so when the opportunities present themselves you are ready to make your move swiftly and carefully. I vividly remember watching experienced sharks play take advantage of the 2008 melt down. They knew when and where to be at the right times to take advantage of all the blood in the water.
Sharks keep their powder dry for the inevitable buying opportunities that follow run away bull markets. They know there will be a correction and they know what to do.