1 Question to Ask Yourself When Investing in a Crazy Market

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Who would have ever predicted that a brick-and-mortar electronic retailer going though a multiyear decline would have a stock that skyrockets 15 times over a few days? Or that a down-and-out movie theater chain’s stock would almost quadruple in one day?

What has happened to GameStop (NYSE:GME) and AMC Entertainment Holdings (NYSE:AMC) stocks in the last week can only be described as crazy. How should investors stay calm and carry on? On the Fool Live “Mindset” show from Jan. 27, Motley Fool analyst Tim Beyers and Fool.com contributor Asit Sharma discuss the one question investors should ask themselves before they jump into a market that seems like it’s lost its marbles. 

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Tim Beyers: How do we invest in this? What do we do? Well first things first. Let’s recognize that what we’re seeing right now is it may be engendering excitement, anxiety, lots of different emotions, and emotions are information. That’s all they are. Emotions are information, and that’s it– and so what we want to do is be disciplined. Remember, we’ve had this in the past, Asit we’ve talked about this. Like one of the questions we used to have and we’ve used before is: what is true? What is true? Now we know what is true. This is an artificial construct.

We don’t want to be messing around with things like shorting these things [such as GameStop stock]. This is dangerous territory. When we’re playing with our portfolio and we’re thinking about how to stay in the game or maybe make decisions about getting into stocks that might be moving around crazily like this instead of paying attention to our existing portfolio, we’ve got four questions. I want us to be able to see in situations like this, am I reacting to the dopamine, am I reacting to the adrenaline, or am I being thoughtful about making a decision here? That’s kind of where I want to get us to.I want to get us over to that. 

Here’s question number one, when we’re thinking about this. Let’s put this in the context of GameStop. Let’s put this in the context of GameStop, AMC, Tootsie Roll, anything that has gone to the moon. So, here’s question number one. Why are you chasing this idea or any new idea? Why are you chasing this idea? Why is the most important question. I have to tell you. Asit, I know you know this. We’ve talked about this in other mindset sessions. Why is the most important question.

Why are you chasing this idea? This is going to give you an opportunity to step back and say, well, I really want in on this. It’s what Asit said. It is. I do fear that I’m missing out and I’m not going to get more opportunities like this. You want to identify what it is that’s going on [in your head]. That’s question number one. Asit, anything you want to add there?

Asit Sharma: Yeah. This is a very persuasive question. Why are you chasing this idea? Many times, it’s a circuit in your brain that’s saying, hey, I don’t want the difficulty and discipline of having to find a good company and just hang onto it. Yeah, I get all that stuff about ten-baggers and multibaggers, and if I hold onto great stocks, it can really increase my wealth. But I’m seeing this thing in real-time, which takes all that pain and long-term investment of research and emotion that’s being collapsed into something that could potentially have the same effect within a few minutes, a few days, a few hours.

I go back to Tim’s comparison of the two quarterbacks. [laughs] Ok, then. If we’re motivated by this desire for relief to avoid what’s difficult but ultimately rewarding, then we can only expect to be so successful. One reason for this is, for those of you who have ever traded before, and frequent viewers know that I started out day trading. It’s a very, very difficult process to repeat over time. You need a mathematical edge in the markets if you’re going to do this. In other words, you need, in many cases of a vast amount of technical knowledge, chart tracing, which I don’t even understand, you need a probabilistic edge, and you need a really, really, good money management system. Have to be world-class at managing your capital. Some of the smartest people I know don’t understand how to manage capital.

If you’re wondering what’s going on in the big markets today, it’s because some of the brightest minds on Wall Street didn’t know how to manage their trade size. They took on bets worth hundreds of millions of dollars and they’re losing in the billions for this. Some of the most intelligent people have difficulty managing trade size.

Therefore, I’m just here, probably preaching to the choir. I know we’ve got a bunch of viewers on this session today. But to say that this is extremely difficult to do on a regular basis, and what seems like immediate relief becomes pain when you try to do it the second time or third time, and maybe you mismanaged capital. Why are you chasing this idea? To me, Tim, it’s partly emotional. I may not want the difficulty of hanging on to a great stock overtime, even though my brain tells me that’ll work out and it’s probably the easiest thing to do, to buy great stocks and leave them there.