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By Christy Heady
There is no play riskier in football than making a last second, desperation pass play to the end zone. The game clock is running out, the opposing team's defensive coordinator knows the play is coming, and the defense is set up and ready to foil the attempt.Hail Mary passes stimulate the minds and hearts of spectators, sports announcers and teammates. After all, that last second chance to claim success offers something needed in a time of helplessness -- hope.
Is it a strategy that you can take off the ball field and into the investment arena?
Not so fast.
There's a Difference Between Football and Your Portfolio
Investors who are trying to recoup their losses quickly during the current market environment often feel the urge to gamble, since it seems there is no other way to recover. It's like buying lottery tickets. During bad economic times, when incomes go down, lottery sales go up.
Financial recovery is progress, not an event.
People tend to like positively-skewed, or lottery-like, distributions of returns. And investment research shows that investors believe payoffs loom larger than probabilities.
The psyche for an investor to throw a Hail Mary pass today would mean he would have to be correct in the belief that he is so much better than the other active investors that he will overcome higher investing costs to beat the market just to recoup his losses.
What's to be understood is that there is no difference between losing with a conservative play and losing with a failed Hail Mary.
Desperate Investors Do Desperate Things
Most Hail Mary passes fail -- in the stadium and in the stock market. But that hasn't stopped investors from seeking low-priced, high volatility and high return stocks to help them wipe out their portfolio deficits.
Professor Alok Kumar from the McCombs School of Business at the University of Texas at Austin calls these types of stocks lottery stocks -- usually about $5 or less. He found that during economic downturns, individual investors bet more on them, and chalks it up to this Hail Mary strategy appearing to offer a shot at catching up to an investor's rich neighbors.
Kumar combined the brokerage account records of nearly 100,000 people with demographic data over a five-year period. His results showed that, like a Powerball ticket, with lottery stocks investors ignore that, while the stocks cost almost nothing, they offer a high chance of losing. But it is the glimmer of hope that makes them shell out their money for possible returns. And the deep rooted desire to gamble to overcome adversity is deep in the human psyche, Kumar found.
His results show that lottery stocks on average yield lower returns than selecting more conservative stocks. On occasion, the report offers, they will eke higher returns. But far more often than not, they lose. Investors could earn as much as three additional percentage points a year by replacing lottery stocks with more conservative blue chips.
Kumar isn't alone in his premise. A study by three Brigham Young University finance professors found that some risky stocks like lottery stocks have historically paid investors low average returns. These stocks, the BYU study found, carried a large lottery component. They were newer, smaller and had a wider variation in price. They found there is a very small chance the future price will explode and provide immense returns.
3 Tips to Rebuilding Your Wealth
You might not want to hear this, but here's the prudent path: Grit your teeth and grind out your gains one slow conservative play at a time. Rebuilding wealth takes patience, wisdom and fortitude, and cannot be done through acts of desperation.
Here are three additional mistakes to avoid...
#1. Buying a stock whose fundamentals are bad just because the price is low. Investing in lottery stocks is akin to gambling.
#2. Trading too much or trying to time the market. You don't want to be involved too often unless you are a day trader and making a living this way. You are probably in for the long haul, so do not panic during the short-term downturns.
#3. Not rebalancing your portfolio. Is your portfolio out of whack? Are you over exposed or under exposed in one area or another? You can leave your long-term investment portfolio alone, but it doesn't mean you should never make changes. If your age or family dynamics have changed, it's time to reexamine your portfolio.
If you fixate on the money you already have lost, then your mindset could be that a modest future gain would only reduce those losses. So many people instead opt for a chance to strike it rich with a high risk, high volatility, low cost stock.
The odds are not in your favor. Unless the game clock is running out, you never call for a Hail Mary.
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Today's Laugh Line
"The American League was defeated 8-0. The American League also lost the 2011 All-Star Game as well as the 2010 All-Star Game. Under President Obama, America's own league is on a losing streak. Mitt Romney will fix the American League and make it competitive again." -- David Letterman
(Got Jokes? Send your best jokes or funny videos to editor@tycoonresearch.com ... if it makes us laugh, you might just see it in The Tycoon Report some day!)
1998: Medicare subsidiary forks over $140 million
1998: Medicare subsidiary forks over $140 million
July 16, 1998 was a dark and costly day for the Health Care Services Corporation, as the giant Medicare subsidiary agreed to settle a pack of felony charges by paying the federal government roughly $140 million. The Medicare carrier for both Illinois and Michigan, Health Care Services had been charged with eight different counts of felony, including the mishandling, and even shredding, of claims, and various attempts to manipulate and obscure evidence. On top of the hefty civil settlement, the Medicare giant also copped to charges that it had blocked government attempts to audit company records; the price tag for this confession was a mere $4 million. In the wake of these settlements, the government pledged to keep a close watch on Health Care Services and even locked the company into a "strict corporate integrity agreement."
Source: www.history.com
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