Investing, Taking Risks, and A Game Of Darts
By Pinyo • May 30th, 2008 • Category: Investing, Making MoneyLast night, I was scanning through various submissions at PF Buzz and stumbled upon two articles that I liked. In short, I agreed with one, but not the other — interestingly enough, both of them mentioned Robert Kiyosaki.
Invest With The Best
The first article was “Which is Better - Diversify or Focus Investments” at PennyJobs.com. Basically, Curtis agrees with Robert Kiyosaki and believes that it’s better to focus your energy on the winners instead of diversify. You should concentrate your effort on finding a system (or systems) that works well. Once you do, just put everything you got in the winners and you are sure to come out ahead.
This is something I disagree with to a degree. I believe in continually experimenting to find something better, but not at the extreme that Robert Kiyosaki advocates.
Frugality Is The Key To Wealth
The second article was “Why living cheap is more important than investing” at Living The Cheap Life. This article argues that frugality is one of the best ways to build wealth and that investing is less important. If you read Mike’s article carefully, he really meant trading, because he believes that “you should toss your money into an index fund and be done with it”.
Mike also went on to say that Robert Kiyosaki’s way is not for everyone. Sure, a few may come out ahead and hit a home run, but the vast majority would be disappointed.
This is something I totally agree with.
A Game Of Darts
After I read these two articles, an image of a game of darts comes to mind. But the rule of this game is slightly different than a typical one. You can choose one of the two ways to score:
- Always aim for the bullseye and get 100 points every time you hit it, or
- Hit anywhere on the board and get 1-20 points depending on the slice you hit.
If you are a hardcore student of Robert Kiyosaki, you’ll think option #1 is obviously better. At least that’s what he advocates in his books where he said find the system(s) and stick with it. If you believe in indexing and diversification, then you’ll choose option #2. Although you won’t be scoring 100 points per hit, you’ll get something for just hitting the board.
Now forget investing for a minute and ask yourself, which option would you choose if you have to play this dart game. Personally, I’d choose option #2 because I am assuming much less risk, and I have a much greater chance of scoring points. Why? I am much less likely to hit the bullseye, but I am comfortable that I’ll hit the board 99% of the time. Of course, there will be a few darts throwing experts that choose option #1, but how many people is a darts throwing expert. So ask yourself this? If you are not a darts throwing expert, are you really an investing expert? Then why are you playing the fool’s game?
Sure, Robert sounds great with his optimistic bravado. But in reality, he’s a motivational speaker that sells books. He makes you feel good and makes you believe that you can do the extraordinary. However, let’s be realistic — I am never going to be as good as Warren Buffet in investing, Tiger Woods in golf, or Dale Earnhardt, Jr. in racecar driving (but obviously these people do exist).
Photo by iDream in Infrared via Flickr
I love this analogy and I think you are dead on in your thinking here. I would love to be extraordinary at something but I think there’s nothing wrong with realizing reality and diversifying to instead do a few things well. Stumbled!
Dude, I think you just nailed one of the most important personal finance skills: know your role. (Okay, that’s a quote from The Rock or something, but it fits…) This is why blanket advice gets a lot of flak–because some people *are* good enough to swing for the fences or hit the bullseye time after time. For the rest, those small victories are the best way to keep things adding up.
Great post. Thanks for referencing my article. I like your analogy to the game of darts. But, of course I have to disagree at least a little bit.
Based on the direction of the dollar and the stock market over the last decade (as explained in my article), diversifyed investing in domestic mutual funds is MORE risky then finding a few winners or investing in your own business that has historically beaten the market.
Thank you Emily and Sara.
@Curt — Ah, but that’s why we diversify internationally. I would put all my money in the U.S. either.
When I play darts I tend to fill up my numbers before I go for the bullseye as that’s the toughest to hit (cricket if I recall correctly). An analogy here could be diversify with less risk until you have enough experience to try more focused investing. Then maybe you can go for some riskier stuff.
Some days I just can’t hit the bullseye (might have something to do with being at the bar). On those days I keep filling up the easy points. If you know you can’t do focused investing then go for the easier diversification. You can still get ahead in the long run.
Who can hit the bullseye every time? Nobody I ever played darts with, anyway. This leads me to the conclusion that either this investment idea makes precious little sense, or the analogy is flawed (most likely the latter). I think that international diversification makes the most sense in a lot of ways, especially now that the dollar is absorbing a hit overseas. It gives you a little bit of insurance that you can have SOME element of your portfolio that is doing well, even when others are taking it on the chin or treading water.
Jerry
Thanks so much for the mention. If I could hit the bullseye every time, I’d choose option number one - but I’m too lazy for that and would rather focus my energy on other things.
Different people have different risk tolerances and payout expectations. It’s like the lottery. Sure the odds are about 140 million to one, but that ONE,..
Anyway, great article.
Hmmm….If you aimed for the bulls eye every time, you would likely at least hit the board so you get the best of both? Does that make this a flawed analogy (or did I miss something)? I get your point though.
Personally, I think it is important to start investing early rather than wait till you have lot of knowledge. So I think index investing till you are somewhat skilled and slowly shifting into the focused category is the way to go, in practice.
@FFB - That’s a good strategy. I think the idea of building a solid foundation before concentrating on focused strategy is good. Even if your idea fail — which it most likely will most of the time — you have something to fall back on until you struck gold.
@Jerry — But that was exactly my point. People who advocate going all out with focused strategy are basically saying that you can hit the bullseye every time…and that is flawed.
@Subba — You may have missed it. The rule is slightly different and the person who aims for the bullseye do not get point for hitting other part of the board, and the second person do not get point for hitting the bullseye. It’s done to illustrate a point.
“So I think index investing till you are somewhat skilled and slowly shifting into the focused category is the way to go, in practice.” <– that’s a great strategy, and yes, it’s important to start early.
I think that we can learn some important pointers from investment speakers, but the reality is that we also have to make the right decision for our own personal situation and sometimes that means compromise.