Last Friday I heard this great conversation but didn’t want to post about it until the results were in:
Riding the bus home from work, I was reading and eavesdropping on the two young men behind me. They were planning to place bets on Saturday’s Giants/Patriots game.
No. 1: How much are you putting down?
No. 2: $50 on the Giants.
No. 1: Are you nuts? Why would you bet on the Giants?
No. 2: Look at the odds! I mean, I’d win what–$15 if I bet on the Patriots? But if the Giants win, it’d be over a hundred.
No. 1: But that doesn’t matter because the Giants won’t win.
No. 2: Yeah, I know. But if they did…
I don’t know how Number 2 ended up betting, but the game went to the Patriots…as so many have this season. I don’t follow sports, but I was fascinated by the comparative risk tolerances of the two young men.
The first seemed very logical. He knew he couldn’t make much money by betting on the Patriots, but he also thought the odds weren’t good enough to risk losing his $50 (or whatever he was betting).
The second also knew that the Patriots were the most likely win, but he was excited by the idea of more than doubling his money.
My personality is definitely that of the first young man. I believe strongly in indexing, in not trying to beat the market, etc. I’m also too scared to try financially risky things (ok, job excluded).
But the second young man gives me an insight into why people would do anything other than index. And in the stock market, fortunately, it’s not an either-or proposition like a football game.
Instead, investing is a game of looking for better and best. As an investor, No. 2 would be looking for stocks with really high returns or which he thought might skyrocket (or at least exceed the market). Or maybe he’d get involved in some really hot-looking funds. Sometimes this is little more than gambling. But fortunately, it doesn’t have to end as badly as his Giants bet. (Which probably wasn’t a financial catastrophe for him either.) A stock-picker may average around the same as an index fund. Or they may pick funds which only underperform the market by a little.
Of course, besides being risk-averse, I also see some guaranteed losses in following the top stocks (depending on your eligibility for free trading). And I think that the biggest investors–funds and the like–tend to have a huge advantage over us smaller people.
Maybe some people can beat the market. Me, I’m satisfied with getting $65 for a $50 bet at good odds of winning it.
What’s your risk tolerance? What might you be willing to invest in? Do you keep a little money on the side just to play the market for fun?
photo by jmwests