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Risk Tolerance: Giants vs. Patriots

patriotsjmwests.jpg

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


{ 7 comments… read them below or add one }

remodelingthislife December 30, 2007 at 8:49 pm

If you hadn’t mentioned team names I’m like the guy who wants to double his money. But I’d never pick the Giants over the Patriots 🙂

I think I’m pretty much really gung-ho to watch my stock picks skyrocket. I’m fortunate enough to have free trades when I do trade stocks so it’s really fun for me to pick one and see if I was a moron or a genius.

I am very very risk tolerant.

CatherineL December 30, 2007 at 10:38 pm

Great post Mrs M. I don’t gamble on football, horses etc as I just think it’s crazy. You can’t change your mind halfway through the game and get your money back if your team is losing. But you can set stop losses etc if you invest in the stockmarket.

I used to be an active investor – but nowadays I keep everything tied up in my own business.

It really is important to do a lot of research and know your stuff if you’re going to pick your own stocks. A couple of times, I’ve bought stocks on a whim and lost a lot of money.

Mostly, I would pick six shares and usually two would do badly, two would produce average returns and two would do well.

I would usually do quite a bit of research first and understand the sector I was investing in, and things that could happen that might have a detrimental effect on that particular business. I would also send for company reports on the business in question to make sure the company met my financial criteria for investing. And I’d also do I bit of research on the Directors of the business too.

So, I suppose I’m not a huge risk taker. Occassionally I’ve taken foolish risks, but mostly, I like to do my research first.

Millionaire Mommy Next Door December 30, 2007 at 11:23 pm

Great use of this story. I’d like to point out that with stocks, though, you aren’t limited to just two “teams”. It is possible to pick stocks that are “playing ball” well AND will “score a field goal”.

My investment portfolio risk is about equal to the broader market, yet outperforms nonetheless.

I wish I could add a few more football analogies, but I’m not much of a sports fan…

E.C. December 31, 2007 at 12:27 am

What do you think about the “index plus a few approach” espoused by the Motley Fool in which invest primarily in index funds but devote a fraction of your portfolio to picking individual stocks you think stand a good chance of beating the market? I’m enough of a chicken that I want to accumulate more money before I invest in the stock market, even in index funds.

RacerX December 31, 2007 at 12:38 am

There was column somewhere on investing and psychology and there were two questions:

1. If you lent someone a dollar today and they would repay you one of theese ways what would you take: A. The dollar back later today or; B. $2 next week.

2. Would you rather invest $100 in something with: A. 100% chance of a $200 returned, or B. 80% chance of $300.

In both cases it would be better financialy to invest in B. Question one is pretty obvious(although most said A) but question two becomes a look at how your would invest in general.

B is the right answer because 80% of $300 is $240, a $40 better return.

My problem is that I like A’s safety and B’s payout!

mrsmicah December 31, 2007 at 7:10 am

E.C. I think that’s a good approach, especially for people like this second guy. I’ve heard some bloggers talk about using 10% of their portfolio for experimentation and such. I think it’s a great outlet.

If I chose to do it, I’d probably just do a lot of research into funds that were trying to invest in socially responsible companies instead of trying to beat the market. But as I said, I’m risk-averse and I’d rather just know my money was going to something good…

paidtwice December 31, 2007 at 9:23 am

Did they really find somewhere to bet on the Giants with no point spread? Hmm.

You should read Wise Investing made Simple, Swedroe uses a lot of sports analogies to compare to the market too 🙂

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