How to Manage Your Investing 'Bankroll'

Many of you know my father was a “professional” gambler. I put it in quotation marks because it was what he did with the last few decades of his life, but he didn’t do it that successfully.

Going to visit him, though, through those years led me to learn about gambling myself.

To be honest – I always felt like I was taking enough risks with my trading profession, so I wasn't that interested in gambling, but I was interested in the math involved.

Of course, our trades have a much higher chance of working out than picking red or black at the roulette table. But as with gambling, investing does include a chance of losing your money.

That’s why the most important thing you can do as an investor is to be disciplined.

Whether gambling in Vegas or investing in the stock market, one of the first things you should do is lay out your goals.

I’ve always enjoyed blackjack because it’s the casino game with one of the smallest house advantages and involves math.

I have two goals when I play: to enjoy myself and try to win money.

In investing, “enjoying yourself” is a valid goal, too. Investing can be intellectually engaging. It lets you learn about new businesses, economics, human behavior, and psychology.

But unlike gambling, you are not at a mathematical disadvantage when you invest (if you do the work and maintain your discipline).

When I walk up to the blackjack table, I make two decisions ahead of time: how long I want to play and how much money I’m willing to gamble (and potentially lose). Then, I either lose it all (and walk away from the table) or double my money (and walk away from the table).

That approach has treated me well on the blackjack tables – and in the stock market – over the last 20 years.

In blackjack and investing, I live by the same saying: “Plan the trade, trade the plan." The same advice can apply to both…

• Never gamble (or invest) your rent money or mortgage.

• Never gamble (or invest) more money than you can afford to lose.

• Stick to your bankroll.

• Have an exit strategy.

The only difference is that the house doesn't have an edge when it comes to investing. You do if you’re willing to do the work!

Stop Losses: A Key Part of Our Investing Tool Kit

When it comes to the stock market, managing your money is imperative.

But there’s a difference between “trading” and “investing.”

Trading means focusing on tactical opportunities across a short time frame (a few days to a few months). This is where you can take advantage of technical factors, like a stock seeing buying demand from being included in an index… short-selling into the expiration of an IPO’s lock-up period… or simply buying great companies when the rest of the market gets panicked.

These are primarily technical or tactical factors based on the stock rather than the company's fundamentals. As regular readers know, we look for these types of opportunities. Still, we make sure we’re buying companies with solid fundamentals, too. This approach allows us to identify stocks with a high "hit rate" while minimizing losses.

(Investing, conversely, means taking a longer time frame – sometimes years or even decades. I spent most of my career on Wall Street looking for these types of investments, and we write about them in our publication HX Legacy.)

One of the most important ways to minimize losses is to stop losses.

Simply put, a stop loss is a determined price at which you will exit a position.

Stop losses can take many forms: hard stops (a specific price level) and trailing stops (which change as the stock moves higher) are the most popular.

No matter which one you use, stop losses, instill discipline, take the emotion out of investing, and help minimize your losses.

We expect to win far more often than we lose. Stop losses help us avoid catastrophic blowups and make a profit over the long term.

Above all, stop losses help us abide by the mantra you’re probably sick of hearing by now: “Plan the trade, trade the plan!”