By Robert J. Bacarella | July 9, 2019
As someone that deals with financial topics throughout my day, I like to bring up some of what I learn with my kids. Now, I don’t know if your kids or grandkids are like mine, but my kids would rather do chores than hear me talk about investments or the difference between a debit and credit card (I know, exciting stuff, right?). I know as soon as I start talking about “boring stuff”, you can pretty much cue the eye rolls and heavy sighs.
That’s when I started looking for things that they are interested in, where I could weave in some basic financial skills or habits. I call it, learning through financial magic (I don’t really call it that, I just thought it sounded cool, plus I could be the financial version of Harry Potter, but with a dollar sign scar instead of a lightning bolt).
For anyone that has been in outer space or under the sea for the past year, Fortnite is basically an online video game where you and 99 other players get dropped on an island with a bunch of weapons and the last one standing wins…wins what exactly?…I’m not sure, but I do know there is excitement in our house when someone wins (also a lot of yelling when they lose). Since Fortnite is something that is important to my kids, I take the time to watch them play, understand the game, and talk to them about it.
Now is about the time when you are asking yourself, “How exactly does this relate to investing?”
Know the value of information
Fortnite does not charge anyone to play the game, but instead sells items in their shop that allow you to change your little avatar’s (a cool way to say the person you are in the game) appearance, axe to chop stuff up and glider to bring you down to the island, as well as adding to your in-game dance moves. I completely understand that last sentence sounds absolutely crazy, but trust me, it is accurate…the big takeaway from this is Fortnite provides you with the ability to spend your hard-earned money to purchase items (well, actually you have to convert money into v-bucks, but let’s not make this too complicated).
As I watched one of my kids buy a “Cuddle Team Leader” costume for his avatar (picture a pink Care Bear that has grown up and now carries a gun), I had the following conversation:
Me: “Wait, how does buying a pink teddy bear costume help you win?”
Son: “It doesn’t, it just looks cool.”
Me: “Wait, so it doesn’t help you win or give you an advantage?”
Son: “No, nothing you buy does.”
Me: “Wait, you mean all of this stuff you buy doesn’t help you? Why are you buying it?”
Son: “Because it looks cool and it makes my “Electro Shuffle” dance look even better.”
Me: “Wait, what is “Electro Shuffle?”
This conversation taught me two things: one, I use the word “wait” a lot to start sentences, and two, all of these costumes, axes, dances, etc., that you can buy in Fortnite are just noise. What I am trying to say is while it might look cool to be a huge Care Bear, it doesn’t make you a better player or give you a better chance to win.
Similar to the items purchased in Fortnite, much of the information within the stock market will not add value to your investment decision process. One issue with information is there is just too much. In fact, there is so much information that it leads to what I call information paralysis (i.e., so many varying viewpoints and information that you can no longer make a decision).
For example, let’s say you are thinking about buying Facebook. You go out to the internet and find four articles that say it is a buy and four articles that say it is a sell. All of the articles have statistics and ratios and information that support their respective buy/sell opinions. What do you do? Who do you trust? You trust yourself. You need to quickly sift through the information available and identify the reasons to own a specific stock. If the reasons are compelling, buy the stock, but be ready to react to new information. You are going to make mistakes, but learn from these and the better investor you will become.
Another aspect of information to consider is you must be careful to avoid confirmation bias—that is, the tendency to look for, interpret, and focus on information that confirms your thinking. For example, let’s go back to our Facebook example. You find the same four articles that say Facebook is a buy and the four articles that say it is a sell. Because of confirmation bias, you put greater weight on the articles that support your belief that Facebook is a buy. Or even at a higher level, you only look at sources of information that you agree with and ignore sources that tend to go against your thinking (this happens with political opinions all of the time, but I’m not even going to come close to that third rail in this write-up). A successful investor tries to take in all opinions and information to make an informed, unbiased decision…and yes, that includes information that goes against what they want to do.
It is important to differentiate between information that is just noise and what information is actually helpful in finding the right investment for you. I’m not saying you shouldn’t splurge on a Care Bear suit if you want one; what I am saying is make sure you know that being a Care Bear won’t make you a better Fortnite player or investor (unless there is an Investment Care Bear I am unaware of). Investing success is more about strategy rather than searching for some unknown information.
Choose the right strategy
While it hurts to admit it, I am well beyond my peak video gaming years. Back in the day I used to be a wiz at Mario Brothers, Zelda, and MarioKart. My kids watch me now and basically just mock my skills. Honestly, they have the right to do so because they are so much better than me.
So, instead of getting mocked, I just sit and watch them play…and mock them when they lose (I actually don’t mock them…at least not that loudly). By now, I have probably seen them play a couple hundred Fortnite matches, plus hundreds of clips that they send and show me. The thing that boggles my mind is how my kids’ strategy never really changes…it’s basically offense, offense, offense. And let me say this, it is not just my kids, but basically almost everyone playing Fortnite. The majority of players chose the most crowded spots on the island to land (I’m looking at you, Tilted Towers), grab some weapons, and basically start attacking like they are Rambo.
Unfortunately, unlike Rambo, their strategy does not work very well, and they usually are killed within minutes. It’s when my kids are fuming over the loss when I try to talk to them about their strategy (actually lack of strategy). I tell them if your goal is to win, then the best strategy is to avoid the action until there are only a limited number of players left.
I remind them, “You can’t win the championship, if you don’t make the playoffs.” This defensive strategy gets you into the playoffs. Now it doesn’t guarantee you will win, but I like their chances against 10 players, rather than 99.
The problem with this strategy is that it is boring. I’ve just changed an action-packed game into a 30-minute game of walking through the forest, avoiding all fun, and sometimes doing so dressed as a bush (it’s actually called “bush camping”, which is as boring as it sounds). I get it, it’s boring, but I think it’s the right strategy to use if your goal is to win…I have found that while my kids want to win, they would rather win (or lose) as Rambo rather than be like me—an old man hiding in a bush…wait, that doesn’t sound right.
When it comes to investing, I believe taking the “boring” approach is the right strategy to be a successful long-term investor. In other words, invest defensively and take advantage of opportunities when they present themselves. Too many investors run into the equity markets, like my kids in Fortnite, and take excessive risks to earn high returns. This strategy may work sometimes, but cannot be consistently relied upon to produce long-term results. Just consider the fact that over the long-term, 90% of professional active managers (Rambos) cannot beat the S&P 500 Index.
So, what does a defensive strategy look like when it comes to investing in the markets? Well, it is similar to my theory in Fortnite, in that “you need to make the playoffs first.” Let’s assume your goal is to beat the S&P 500 Index. The offensive strategy would be to go out and buy a bunch of companies that you think will do well and hope you are right. A defensive strategy is to hug the S&P 500 Index and look for opportunities to take advantage of. This can be accomplished by allocating a large chunk of your portfolio in exchange traded funds that track the Index. This guarantees that a large portion of your portfolio will track the market return (i.e., keeping you in the game). You should use the remaining portfolio to take advantage of opportunities that arise; this is the portion you actively manage. It doesn’t mean that you are not going to make mistakes, but with half of your portfolio matching the Index return, the impact of your mistakes is minimized.
My kids finally got so sick of me telling them to play Fortnite with my defensive strategy that they said, “If you are so smart, let’s see you do it.” So, I cracked my knuckles, grabbed the complicated controller and played Fortnite for my first and only time…to my kids’ utter dismay, I came in 3rd…take that Rambo!
Learn from the best
One of the more interesting game modes within Fortnite is squads. This mode basically lets you team up with your friends (usually four players) and play against a bunch of other teams. I actually think this mode is way more fun for my kids to play because they get to talk to each other and work together to win. And that is exactly how my kids see this mode, as fun.
Well, not surprisingly, I say, “Who cares about the fun, does this strategy help you win?” (Believe me, I can suck the fun out of anything.) In this case, the answer is a resounding YES! What I have noticed is that my kids are often playing with friends that are better at playing the game than they are. Well, that sounds good, right? Someone else does all of the work while they can sit back…but that is not the true benefit. The benefit is that my kids learn to be better Fortnite players by watching their friends play. They even spend a lot of time watching YouTube videos of the best Fortnite players in the world (e.g., Ninja, Myth, Daequan) and, you guessed it, they learn stuff from them, too!
Similar to learning from skilled Fortnite players, I believe you can also learn a lot by studying the investment approaches of other successful investors. Investors like Warren Buffett, Peter Lynch, and Gerald Loeb (trust me, he is a legend) all have applied successful strategies that have done well in the market. And guess what, not only were they successful, but they tell you a bunch of their secrets in a multitude of books! Now, I am not saying you should just blindly imitate certain investors (believe me, they all make mistakes too), but what I am saying is there is a lot of knowledge out there that you can benefit from…why not use it?
While my kids probably still think I am a boring old man, the truth is, they are slowly learning critical investment skills through something they enjoy. I am not sure when the whole Fortnite craze will end (Apex Legends maybe?), but whatever comes next, I guarantee you there will be lessons to learn that can be applied to investing (i.e., financial magic).
Well, at the very least, it will be another opportunity to spend time with my kids and teach them something useful.
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