The Difference Between a Good and Bad Bet
What is a bet? It is belief in an outcome that the person placing the bet thinks will occur. You can lose with a good bet, and win with a bad one. Knowing if the bet placed is good or bad comes down to the fundamental decision you are making, not the outcome.
A good bet is done by completing extensive research prior to placing such bet. A bad one is blindly placing one for the thrill or whatever short-term reasoning one bases the decision on. In finance, you can relate this to mistakes like the Fear of Missing Out (one of the most dangerous emotional thoughts in Public Markets). In life, you can relate this for example to spontaneous purchases like the terrible pair of shorts you bought online because of an ad you saw while scrolling through a social media site (don’t feel bad, I have done this as well). You can never win every time with either strategy, because the future is always unknown. Although, placing good bets consistently will lead to success in the long-term.
Why do I say this? Because bets with emotions removed and proper research done becomes an investment. In other words, an investment is a “good bet”. I have nothing against skillful traders, trades placed can be good bets. This kind of strategy is just beyond what I understand which is why I have never been a trader. I believe in the fundamentals of long-term investing for placing my good bets. This still doesn’t change what a good bet can be for someone else. If they are skillful in the technical analysis of short-term market moves, or knew that Patrick Mahomes wasn’t going to be playing in the football game before the public, then by all means make those bets. Only make them though if you believe there is enough conviction for your desired outcome. I just use a different strategy to find good bets for myself and my clients. This is because I am comfortable making the bets that I can comprehend (which is not speculating on who is playing in the football game or where a stock will be by the end of the day), which helps me remove myself from the inevitable short-term emotions. This doesn’t mean my way of making “good bets” is the only way, but it is the way I am comfortable with. I want you to find your comfort level, not mine. Use mine as only a guideline to develop your way of making good bets and what I mean by this is completely understand your approach to your process.
My main point in this article, is to know what you understand and more importantly know what you don’t. None of us can ever know it all. If you think you do, then eventually that philosophy will catch up because none of us will ever “know it all”. Also, place your bets in an intelligent manner by not placing the bet until you understand the potential reward as well as the risk. There is risk in everything you do, and it should not be shied away from. Nonetheless, if the risk seems too high for your well being (aka, investing too much of your money into anything that if it goes the other way, it impacts your current life) then seriously consider if the bet is even worth it. A high conviction bet that could be good WILL be a bad one if the outcome drastically changes your life with either (good or bad) outcome. If it goes right, good for you. But you always have to consider: what if this doesn’t work out the way I think it will? Taking this into consideration is another important difference between a good and bad bet, no matter what the outcome is. Calculated risk vs. reward outside of a vacuum is the best place to look for the mistakes within a belief. Don’t look at your bet with only your view considered.
To wrap things up, I want people to understand the difference between good and bad bets is not based on outcome, but the fundamentals behind the decision. This is not just looking at the decision itself, but the potential impact of the different outcomes because of the decision you’ve made. Always thinking about what happens if I am wrong? Doing this will protect you from a major impact due to the inevitable wrong decision you will make. No one is perfect, and no decision will ever play out as planned. One thing can be done though, and that is consistently making “good bets”. Never risk more than you can take, and never think that your decision is the only decision. Because where there are buyers, there are sellers and you have to try to learn both sides of the story to understand the bet you are making. I hope that this gives you as a reader food for thought about the way you approach the risks taken throughout your life. This philosophy can go far beyond finance, so take the advice into any risk-based decision you make. In my opinion, your future self will thank you for doing so.
-Riley Sisson
Any opinions are those of Riley Sisson and not necessarily those of Raymond James.
