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Wednesday, April 17, 2019

Try to Avoid "Tilt"

Poker players know about "tilt". Taken from pinball terminology it refers to losing good poker technique following a "bad beat". Every poker player has been bluffed by a pair of tens when they held a pair of kings. This can play havoc with one's emotions and can lead to stupid (this is the appropriate word) bets. The cure is to get up, walk around, take some deep breaths and know that emotionally your brain wants to fight back.

Well, the same thing happens in the investment world. To be clear I'm not a fan of most investors buying individual stocks but if you want to do it that's ok. I suggest that individuals mostly use low cost index funds and with 10% at most invest in individual stocks.

Still, if you invest in individual stocks so be it.

So, suppose you bought Boeing on 2/22/19 at $424.05. By  2/28 it is at $439.95 and you are high fiving yourself and (big mistake) bragging to your friends. After all you've got a layup with a reasonable p/e, a wide moat (worldwide duopoly with Airbus), and a nice dividend. Your brain is congratulating you on being a genius.

Then the 737 mess. By 3/12 the stock is at $375.41.  Your brain now has all kinds of scenarios including you living under a bridge. You might look at your other stocks and imagine worst case scenarios. This is TILT !!!!!!!!!!!!!!!!!

Knowing that this happens is in itself valuable and can help you calm down. Think back to 2008 and know that many investors blew out their entire portfolios and never got back in. You've read the horror stories.

The other thing that I suggest is to limit yourself to 5% of total assets in any particular stock and 10% to any industry. This is where the value of diversification really comes into play.

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