Wednesday's Market Minute: Know When to Walk Away

The first choice you make the moment you walk into the casino is how much you’re OK with losing. The fun choice is how you’ll do it. The last, and hardest, is when to walk away.

The only game in which you can reliably make money over time is poker, and, well, good luck with that. If you play blackjack perfectly, you can bring your odds near 50% and if you’re lucky can go on a big streak, but eventually the house wins. Craps and roulette offer some creative outlets to slow the rate at which we lose money, but ultimately the strategy comes down to hoping you hit a luckbox. Play the slots and you’re mostly going to light money on fire, but the nights you hit will be the ones you never forget. 

Investing should be like playing poker: adhere to proven strategy, exercise patience, and watch your returns build over time. In poker, we have mathematically-defined probability ranges to master to achieve this; in stocks, we have history. So far, it’s paid to buy and hold. For many, it also pays to trade high-probability options strategies and hope you don’t get picked off by a black swan. What extensive academic research tells us is that buying and selling stocks in a short-term window is, for almost everyone, unfavorable to parking money in a broad market index fund.

The COVID trading bubble was probably the biggest exception to this truth in the history of financial markets. The boom in crypto tokens rewarded players with the highest risk tolerance, all the way down to those rolling the dice on obvious jokes and frauds. Meme-stock mania in GameStop GME, AMC AMC, and others exemplified the ease with which everyday folks could chance their way into incredible wealth overnight by putting it all on the right roulette tile. The House stopped winning. The casino effectively broke.

Now it’s getting fixed, courtesy of Jerome Powell playing the role of Sam Rothstein. Interest rates are going up and bond yields are rising again. That’s been the stock market’s Achilles heel the past year, and there’s no reason to think anything’s changed.

The pump-and-dump action in AMC, GameStop, and Bed Bath & Beyond (BBBY) repeatedly fall short of previous highs for a reason: the trade is going down. Know when to walk away. Don’t throw good money after bad. Don’t chase the dragon by increasing size on bets of shrinking probabilities. Step away, assess your capital, and change risk tolerance if you’re in pain. Patience always pays. Getting off tilt is easier said than done, and requires a lot of practice. If you’re hurting after the swings in these trades the past week, take a breather. You’ll come back stronger.

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