Imagine you’re a contestant on the game show Let’s Make a Deal.
Monty Hall pulls you out of the audience. He waves $2,000 in your face and says, “This is your money. You can take it and keep it right now, or you can trade it for what’s behind the curtain.”
Of course, you know from a lifetime of watching daytime television that there’s a 50% chance that what’s behind the curtain is an all-expenses-paid trip to Mazatlán – valued at $5,000 – and a 50% chance that it’s something virtually worthless, like a farm animal.
What do you do?
If it’s me… I’m taking the cash.
I’m thinking, “I came here with nothing. There’s a 100% chance I’ll leave here better off if I take the money. There’s only a 50% chance I’ll leave here happy if I take what’s behind the curtain. Either way… my life isn’t going to change dramatically. So I’ll take the $2,000 and be happy no matter what.”
Here’s another line of thought…
“I came here with nothing. The worst case is I’ll leave here with nothing. But there’s a 50% chance to increase the return on my prize by 150%. The odds justify that trade. So I’ll pick what’s behind the curtain.”
Here’s the thing… there’s nothing wrong with either decision. All that matters is how you view the consequences of the trade.
Let me explain…
I’m going to be happy if I get a $2,000 windfall profit. I might be slightly more ecstatic if I win a trip valued at $5,000. But I’ll feel like an idiot if I give up the $2,000 and go home with a goat.
So I’ll pass on “ecstatic.” I’ll take “happy.”
Not everyone thinks that way – which is why we love watching game shows.
Let’s apply this thought process to the stock market…
Every time I close a trade, in the back of my mind, a little voice asks, “What happens if it moves even higher?”
This is the equivalent of Monty Hall asking if I want to keep the $2,000 or trade it for what’s behind the curtain.
I know for sure that I’m happy if I close the trade right now. I don’t know if I’ll be happier or feel like an idiot later.
So I almost always chose to err on the side of happiness.
Now… if this is your only time on a game show… if it’s your only chance to make a trade in front of Monty Hall, it’s understandable if you choose what’s behind the curtain.
After all, it’s your only shot to maximize your gains.
I get it.
But the stock market isn’t a game show. We have trading opportunities almost every single day. The secret to longevity as a trader is to consistently take the money when it’s flashed in front of you.
You might feel a tinge of disappointment if a trip to Mazatlán is behind the curtain. But you’re still heading home with more money than you had before.
Be happy. At least you’re not going home with a goat.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, readers weigh in on Jeff’s prediction about a stock market crash…
I kind of hope you are right. I watched your presentation but never deal in stocks. I am a bullion person, and debt free, so I will be set for what is coming. We will all lose if it gets as bad as I believe… Good luck
– James
Thank you very much for your presentation, I truly appreciated it. I wanted to know, from a reliable source, just when to expect the impending crash. I think you are probably correct… October has always been a rocky month in the financial world, from my experience.
I do have about 70% of my money in cash term deposits, 20% in gold and silver bullion, 5% in crypto…
I did, at one time, think of going into U.S. stocks, but because of the time zone, the exchange rate, and dealing with Australian taxes, it was all too much of a hassle for me in the end. I’m over 70 and need to ensure I can help my family in the near future with what I have.
Now, with your information which you generously shared, I feel I can make a plan out of the bank’s reach. Thank you again.
– Olivia
Was there a time when you decided to take the profits on a trade, instead of waiting to see what might happen next? Have you ever taken home “the goat”?
Let us know about your trading stories, along with any other questions or suggestions, at [email protected].