Finance 101 – Putting Theory Into Practice

This article forms part of our TW3 newsletter, you can read the whole article here.

Nic recently celebrated the Lunar New Year with his girlfriend’s family, and shortly after receiving a few lucky red envelopes indulged in some traditional Vietnamese gamblingIt’s a pretty simple game – the faces of three dice show 6 different pictures (seen below), and you bet money on a picture (e.g. crab) and hope that when the dice are rolled one of them shows a crab!

image

Unsurprisingly, Nic was soon down a whopping $10 – next year he won’t bet on crab. He was faced with a dilemma: does he cut his losses? Or does he chase them? Cooler heads prevailed, and Nic walked away with almost all of his lucky red envelope money.

It’s easy to be sensible with money when the stakes are small – it’s when the stakes are large that our reptilian brains go into overdrive. What if Nic had lost $100,000 instead of $10? That’s a tougher pill to swallow, and many people wouldn’t be able to cut that loss, choosing instead to chase it and almost always losing more money. Even worse – what if Nic had won $100,000? It takes quite a lot of discipline to take your money off the table when it feels like you have the Midas touch.

The legendary investor Peter Lynch once said that everyone has the brainpower to make money in stocks, but not everyone has the stomach. You could read every Finance 101 we’ve ever written (an excellent Valentine’s Day gift if you’re stuck for ideas), and all that wisdom would be for naught if at the first sign of financial trouble you follow your gut rather instead of your brain. We’ve said it once and we’ll say it again – the primary role of an adviser isn’t to deliver sky-high returns, but to help their clients avoid making major mistakes that are easy to understand in theory and difficult to avoid in practice.

View More Articles

Join the Stanford Brown Family

Subscribe to our mailing list to receive the latest news and updates from our team. You will also recieve a free copy of our whitepaper 'The Ten Golden Rules of Investing.'

Successful. Thank you for joining Stanford Brown's mailing list.