Swinging for the Fences

A friend of mine just won $6,800 in the lottery.  I’m not sure how much was “invested” to achieve this return, but I’m guessing it was significantly less than $6,800.  Looking at her lottery win from a retirement-savings perspective, it would be nice if one of my investments were to return that kind of money.  The problem with hoping for this kind of return is that these are generally risky investments.  I (like most people) hate to lose money.

Like the old lottery commercials say though, “you can’t win if you don’t play” – I’ll never be able to achieve the large gains making safe bets on the stock market.  I can expect steady money from dividends (hopefully), but not a significant return that could shorten my working time.  So, what are my options to achieve large gains?

  • I could utilize a gambling system discussed here, which would perhaps allow me to achieve greater gains for the risk taken.
  • I could listen to someone like Jim Cramer or any number of so-called stock prognosticators.
  • I could follow the penny-stock spam (those guys can’t be wrong, could they??) 😉

The bottom line is, is that the “Home Run” is likely not going to come from an index or mutual fund (or other less-risky assets), rather it requires some luck and risking a lot of capital (Robert explains what could be described as a “risky” investment in REITs here, that worked out well for him – a similar gamble was taken by Derek Foster which allowed him to accrue enough capital to retire very early).  To be able to carry this out, I think an investor has to have a bit of a gambler in them, the ability to assess and accept that the bet they are making in the market is the right one, and the ability to not be crushed if the gamble fails.  Although investing in general is a risky endeavour, taking no risk is also risky, as your investment could possibly be eaten up by inflation over time.

Personally, I am not at a point in investing (0% of my household income is currently being invested in the market), but I think that when the time comes, 5-10% of my investments will be made in stocks that would have the potential of increasing significantly.  I won’t like it if/when the investments  fail, but the opportunity to achieve a high return that would significantly reduce my years to retirement would be something (to me) that is worth the risk.

I’m wondering if other people have a “risky investment” account that they have set aside to attempt to achieve large gains?  Do you generally play it safe?  Have you been burned by a risky investment in the past?

8 thoughts on “Swinging for the Fences”

  1. It’s not fun to talk about investments that haven’t worked out. I’ve lost money on penny stocks, although on relatively small amounts invested. You’re right that mutual/index funds will never shoot the lights out. Some very smart people suggest a barbell strategy: split your investments between safety and high-flyers. The safe portion will weather the inevitable storms and the high-flyers should, on average, provide your return. I’m still working out how to implement this.

  2. I think having a small portion set aside to invest in high-risk stocks is a good idea if the individual feels the need for a bit of “excitement” in their portfolio. In some ways it might be helpful in ensuring that discipline is maintained in the “main” portfolio.

    As for lottery tickets, we purchase these primarily for social reasons (e.g. a group is buying tickets in the office, friends, etc.); just for fun conversation and daydreaming.

    Continuing with the baseball analogy, at the end of the day, whether we hit a home run or use a combination of singles, doubles, etc. it’s still worth one point on the scoreboard.

  3. If you have been investing for any length of time, you’ve been burned by both “low” and “high” risk investments. On the “low” risk, for instance, if you locked in some 5% 5-yr CDs a few years ago, they’re coming due now and your rollover possibilities are yielding only 3% at best.

    In my portfolio, I have several high yield REITs (<8% yield) that one can consider risky. In selecting them, I examined everything possible to minimize the risk (did they maintain dividends through the market crash? was their cashflow and profit impacted? what factors will cause them to reduce the dividend?) and get the risk down to where I felt comfortable.

  4. Interesting post…generated the following thoughts for me.

    The total investment market includes an element of gambling and we are all attracted to opportunities that offer easy money…fast. Its part of our shared human condition.

    From an unusaul perspective…losing money fast is more fun than losing it slowly over many years. At least with the penny stock type play we get the short-term excitement or at least the hope of an easy gain compared to the boring long-term play.

    Its very exciting to make your first $1,000 profit virtually overnight…been there done that. Best play was a profit of about $4,000 in about a week. Good for the ego over the short-term. Easy to lose it all on future plays. Done that too. Its a little like going out with a wild woman…done that too.

    In comparison, making nothing on an investment in the stock market over say the last 10 years is still a loss relative to having put the money in say GICs, no matter what the interest rate is today.

    Best to put a total cash limit on the short-term risky plays and keep track of all buys and sells on a spreadsheet so you can’t conveniently forget the losses. Threshold capital to risk is about $2,000. One needs to calculate the profit needed to cover the brokerage costs for buying and selling. Think of it as expensive entertainment.

    Probability of Success
    If one can get is right 70 % of the time it sounds like a good chance to make a profit.

    However, the laws of probability (a little science here) show us that the probability for a successful trade is only 0.7 *0.7 =0.49.

    The probability of getting it right for the required two decisions (buy and sell) is equivalent to therefore no better than a coin flip! Unfortunately this formula holds for all stock market investments, including the dividend stock long term plays.

    On short-term trading for say penny stocks stop buys and stop sells are useful for timing but don’t help much with reducing losses. Part of the problem is that it takes more than a 10 or 15 percent gain just to make up for the last 10 or 15 % loss. Do the math on this one.

    Hope this triggers a few useful thoughts.

  5. Having a small portion set aside to invest in high-risk stocks is a good idea especially if you have time on your side.

    Every time you invest you have a chance to loose, that’s why you have to be careful ( as much as you can) to minimize your loose potential and maximize the growth.

    Lottery I have my “seasons” when I play and times when for months i don’t play. Then I remember that without playing I have no chance of winning.

    what we have to consider is that if the amount we “invest” in playing lottery could it have a better return somewhere else?

  6. We are shying away from risk right now. Mostly cash and GIC’s these days. Given that we are able to save $4000 per month it doesn’t make sense to risk it in this nutty investment environment. If the clouds part and good financial times arrive in earnest, then our cash will be put to work. But not now.

  7. I hit a “Home Run” with my company’s stock I paid nothing for. My lottery winnings ended up being $300k (about $225k after taxes) and with that (and my own investments) I retired in 2008.

  8. @ Robert – I like the idea of the barbell strategy, would be interested in hearing if you ever figure it out for yourself.

    @ Tinypotato – I guess the problem with small gains is the length of time it takes to get there – a large gain allows for less time required investing and more time living off of the gains.

    @ George – good point on being burned at the low end as well as with high-risk investments.

    @ CanadianMoney – Tracking is a good idea with short-term trades – a lot of people remember only the good results and forget all about the 20-30% losses they take on.

    I would hope that over time, the “gambles” would involve less risk of total loss, but even then, there would a significant risk of low returns, with hopefully the chance to gain significantly.

    @ The Financial Power – I guess when you look at it as entertainment vs. investing, the opportunity cost would be a little more limited, depending on how much you’re spending on the lottery.

    @ Jon_Snow – I could see the smaller need to take risks at this point for you, although at some point if you don’t risk something, won’t inflation eat your savings? Although “nutty”, there may be less of a chance in investing in something with a bit more risk.

    @ deegee – that’s a good score, congratulations!

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