Rational Investing: Quick solutions don't lead to long-term success

A few months ago, a young man I know spent an evening at a gambling boat on the Mississippi River, the one just across from the St. Louis riverfront. He went home happy that evening, having won $1,100.

It wasn't just the amount he won that brought the smile to his face, it was that he knew how he had accomplished it. As he told me how he won the money, his smile grew wider and wider. It reached its broadest when, as he wrapped up his telling of the adventure, he said, "I have it figured out, a system that is a surefire winner."

I didn't want to spoil his fun, or mention what I thought would happen next, so I kept my words to myself, except to ask him to keep me posted on how well it worked.

A couple of weeks later I ran into him. I asked him how his trips to the boat were working out. No big smile this time. "I gave it all back and then some," he said. "There must have been something I missed, because the system didn't work."

Should I have told him after his excitement that first evening that his system would eventually fail; that there is no legal system that would reverse the house odds and put them in his favor? If I had done that, it would not have been as effective as his finding out himself by losing the $1,100-plus.

Years ago my dad told me that you can teach a person only so much, the rest they have to learn on their own. I'm not one who has a lot of those, "as my father used to say," sayings. Maybe that's why this one has stuck in my mind for so long.

It also applies to investing vs. speculating. A lot of day traders and speculators heard from any number of sources, who have seen investment bubbles and frenzies, that the price-momentum, tech-mania, dot-com ride was irrational. That didn't stop most of them from riding the parabolic curve all the way to the top and then back down.

I talked with a considerable number of investors who got caught up in the price- momentum buying panic only to learn a lesson not unlike that of our young investor. At the time we talked with most of them, we cautioned against chasing issues that had high price-to-earnings ratios or in many cases, no earnings and increasing losses. I suggested that if they couldn't resist the temptation, they at least limit their trading activity to no more than 10 percent of their investment portfolio value.

We even lost a few clients who were upset when we refused to concentrate their portfolios in Internet stocks. It is likely they suffered substantial losses, because they moved their assets into the tech area shortly before the April collapse. We'll never know for certain, since human nature is such that few of us like to admit being wrong.

There is no magic system for making it quickly. Don't let greed get the best of you.

Here's what works: A disciplined investment valuation approach consistent with your risk tolerance, cash flow into investments and time. There is no long-term success based on short-term speculating.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors. Questions can be directed to him by e-mail via The Springfield Business Journal, at sbj@sbj.net.)