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Kim: Save your riskiest bets for play-money portfolio

Mickey Kim
November 23, 2013
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KimOver the past 2-1/2 years, I have preached “slow and steady wins the long-term investment race.” I have warned of the dangers of trying to time the market and chasing hot performance, both of which lead to self-inflicted financial damage that my friend Carl Richards refers to as the “behavior gap.” I have urged investors to let the miracle of compound interest work for them.

All the above require extreme patience and discipline and can take years or even decades to bear fruit. On an intellectual level, most investors “get it.” Unfortunately, this runs counter to human nature, which demands instant gratification.

It’s the same reason I order the 22-ounce, bone-in ribeye when I know the 8-ounce salmon would be much better for me. Trust me, I get it.

Last month, The Wall Street Journal published Liam Plevin’s “Investing for the Fun of It,” which discussed the merit of having a small “play money” portfolio with which to attempt to fulfill your fantasy of making a quick killing, much like the clever-talking baby in the E*Trade commercials.

The idea is to protect the nest egg that you need to meet your long-term financial goals by confining your urge to gamble to a much smaller account created for that purpose. In the unlikely event it works out, maybe you can buy that Ferrari you’ve always coveted. If it disintegrates, it doesn’t affect your retirement lifestyle.

Plevin cited steps “play money” investors should take to “keep their expectations realistic and their wagers within safe boundaries.”

• Understand your motives. If you’re trading stocks for the adrenaline rush and thrill of possibly hitting the jackpot, that kind of action can be found in any casino. If you find researching and developing investment theses intellectually stimulating, you’ll have the chance to unleash your inner CNBC guru.

• Prepare to lose. Successful investing is a difficult prospect, even for professionals who have amassed fantastic long-term records and devote 100 percent of their focus to the task. Just note that these are the folks you’re competing against. There’s an old poker truism: “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

• Set clear limits. A “play money” account should exist only if your nest egg is fully funded and it should never account for more than 5 percent of your assets. It’s strictly money you can live without. As Vanguard founder John Bogle said, “Enjoy the fun of gambling and the thrill of the chase, but not with your rent money and certainly not with college education funds for your children, nor your retirement nest egg.”

• Remember, it’s for fun. “Don’t take yourself too seriously. If you look in the mirror and think you see Warren Buffett grinning back, it could be a warning you’re about to do something foolish.”

While there’s no sure way to reach investment nirvana, having a disciplined, patient approach gives you your best chance for success. Still, I understand that the Sirens’ “you can get rich, quick” song holds powerful allure.

Unlike Odysseus, we don’t have sailors we can command to tie us to the mast to save us from wrecking our financial ships on the rocks. So perhaps having a “play money” portfolio is the next best thing.•

__________

Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or mickey@kirrmar.com.

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  1. Cramer agrees...says don't buy it and sell it if you own it! Their "pay to play" cost is this issue. As long as they charge customers, they never will attain the critical mass needed to be a successful on company...Jim Cramer quote.

  2. My responses to some of the comments would include the following: 1. Our offer which included the forgiveness of debt (this is an immediate forgiveness and is not "spread over many years")represents debt that due to a reduction of interest rates in the economy arguably represents consideration together with the cash component of our offer that exceeds the $2.1 million apparently offered by another party. 2. The previous $2.1 million cash offer that was turned down by the CRC would have netted the CRC substantially less than $2.1 million. As a result even in hindsight the CRC was wise in turning down that offer. 3. With regard to "concerned Carmelite's" discussion of the previous financing Pedcor gave up $16.5 million in City debt in addition to the conveyance of the garage (appraised at $13 million)in exchange for the $22.5 million cash and debt obligations. The local media never discussed the $16.5 million in debt that we gave up which would show that we gave $29.5 million in value for the $23.5 million. 4.Pedcor would have been much happier if Brian was still operating his Deli and only made this offer as we believe that we can redevelop the building into something that will be better for the City and City Center where both Pedcor the citizens of Carmel have a large investment. Bruce Cordingley, President, Pedcor

  3. I've been looking for news on Corner Bakery, too, but there doesn't seem to be any info out there. I prefer them over Panera and Paradise so can't wait to see where they'll be!

  4. WGN actually is two channels: 1. WGN Chicago, seen only in Chicago (and parts of Canada) - this station is one of the flagship CW affiliates. 2. WGN America - a nationwide cable channel that doesn't carry any CW programming, and doesn't have local affiliates. (In addition, as WGN is owned by Tribune, just like WTTV, WTTK, and WXIN, I can't imagine they would do anything to help WISH.) In Indianapolis, CW programming is already seen on WTTV 4 and WTTK 29, and when CBS takes over those stations' main channels, the CW will move to a sub channel, such as 4.2 or 4.3 and 29.2 or 29.3. TBS is only a cable channel these days and does not affiliate with local stations. WISH could move the MyNetwork affiliation from WNDY 23 to WISH 8, but I am beginning to think they may prefer to put together their own lineup of syndicated programming instead. While much of it would be "reruns" from broadcast or cable, that's pretty much what the MyNetwork does these days anyway. So since WISH has the choice, they may want to customize their lineup by choosing programs that they feel will garner better ratings in this market.

  5. The Pedcor debt is from the CRC paying ~$23M for the Pedcor's parking garage at City Center that is apprased at $13M. Why did we pay over the top money for a private businesses parking? What did we get out of it? Pedcor got free parking for their apartment and business tenants. Pedcor now gets another building for free that taxpayers have ~$3M tied up in. This is NOT a win win for taxpayers. It is just a win for Pedcor who contributes heavily to the Friends of Jim Brainard. The campaign reports are on the Hamilton County website. http://www2.hamiltoncounty.in.gov/publicdocs/Campaign%20Finance%20Images/defaultfiles.asp?ARG1=Campaign Finance Images&ARG2=/Brainard, Jim

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