The world of investing often mirrors the allure of entering a lottery. Just as with lotteries, where the chances of hitting the jackpot are minuscule, we find ourselves drawn to investment strategies with similarly low odds of success. This fascination often leads us to make decisions that are not in our best interest. Here is my observation as to why investors keep doing this:-
- They Don’t Understand Probability (Odds): Many investors dive into markets without fully understanding the probabilities of success. For example, day trading, which might seem lucrative, often results in losses for most participants.
- Wolf Of Wall Street Complex: Some investors think they have a unique edge that makes them better than the average market participant. This could be due to a new trading algorithm or insider tips, which, rarely provide a consistent advantage.
- The Thrill Factor: Good investing is like watching paint dry, it is boring for a long period of time. Just as people play high-stakes games for the thrill, risky “investments” can be exciting. The volatility of cryptocurrency, for instance, draws many, despite its unpredictability.
- One of Us: If everyone else is buying into a certain trend, like a hot stock or a new investment fad, the pressure to join in can be overwhelming. This herd mentality often overlooks whether the investment is sound.
- Incentives are Stronger than Facts: Sometimes the act of investing itself, regardless of the outcome, can be incentivized. This is akin to getting a free lottery ticket – the outcome matters less because the participation was rewarded.
- Asymmetrical Outcomes: The allure of making a large profit with minimal investment can be enticing. This is like how lottery players focus on the potential jackpot, ignoring the more likely possibility of losing.
- FOMO: The investment world often highlights more exciting, high-risk options. This distracts from more stable, long-term investment opportunities.
- The Exception is Not The Norm: We often hear about those who made a fortune in a risky investment, which skews our perception. This is similar to the publicity around lottery winners, making us think such success is more common than it is.
The core issue is that many investors don’t understand their own motivations for investing. Without a clear “why”, no investment strategy can be truly effective, leading to continued participation in these low-probability games. Understanding why you’re investing is the first step towards a successful investment strategy.
If you’re unsure about your investment goals or how to achieve them, consider reaching out to Luthuli Capital. We specialize in helping investors define their objectives and develop strategies that improve their chances of success. Don’t leave your financial future to chance – let us help you create a plan that aligns with your personal “why” for investing.