Investing

How to Overcome Your Fear of Losing and Become an Investing Machine

By Adam O'Dell  |  May 7, 2019

Have you been following him James Holzhauer, the guy who’s on an epic Jeopardy! win streak? He crossed the $1 million total earnings mark faster than any other competitor in the game’s history — just 14 episodes. He also holds all five of the show’s top five spots for the largest one-day winnings.

It’s evident the guy studied trivia and has an impeccable memory. But that’s pretty typical of the thousands of contestants who’ve made a go at it in the show’s 35-year history.

What isn’t typical about James is his background as a professional gambler, which seems to translate into his nerves-of-steel demeanor and highly calculating (and aggressive) strategy, which in turn has everyone wondering if he’s some sort of robot.

Is It So Bad to Be a Robot?

Here’s a summary AP piece on James’ success. I find it interesting how “man or cyborg?” is the leading question. It shows we recognize James’ behavior as decidedly different than what we expect human nature to produce.

You see, whether you know it in your frontal cortex or your bones… humans hate losing.

But James is a special breed. He appears to have no fear of losing, routinely betting his entire bankroll on first-round Daily Doubles, and generally wagers more aggressively than any contestant before him.

Regular people can’t identify with that. We hate losing so badly we simply can’t envision ourselves doing what he’s doing. And that’s why we’re questioning if he’s a human or a robot.

Even Ken Jennings, one of the show’s past superstars, said: “James is a perfect Jeopardy! machine.”

Catch that? Machine. Not “man.” Machine.

Loss Aversion

Alex Trebek brought loss aversion into focus in this story. He reportedly told James how he personally doesn’t gamble because he “could win $1,000 and not care, but that losing $20 annoys him.”

That’s a classic example of loss aversion, which is defined as people’s tendency to prefer avoiding losses to acquiring equivalent gains.

Think of a coin toss, where your odds of winning a single flip are 50/50. You should be willing to take a bet that earns for you $10 if you win or takes from you $10 if you lose. But loss-aversion pioneers Kahneman and Tversky showed most people won’t take that bet. Why?

Because we understand there’s a possibility we’ll lose $10… and the thought of the pain that would cause is just too great to be enticed by a potential $10 profit.

Yes, winning $10 would feel good. But not nearly good enough to justify the pain we’d expect to feel if we lost the same amount.

Loss aversion is a pervasive feature of human nature. It influences our decisions on a subconscious level, in many aspects of life (and, of course, investing).

I shared the concept of loss aversion with you in 27 Stock Secrets of Rich Investors, when I explained how my dad’s hesitance to take a loss on an investment property lead him to act irrationally.

Loss aversion is what prevents investors from cutting losses short when they should be, simply because taking a loss of any size feels devastating and we sometimes can’t bring ourselves to do it.

Loss aversion is also what prevents investors from letting their profits run when they should, since losing even “open,” accrued profits can be psychologically painful — so they lock in their early winnings before that can happen.

And loss aversion is certainly what keeps many investors completely on the sidelines or, if they do muster the courage to be invested, among the herd in passive index funds.

Simply put, loss aversion makes investors do stupid things — very “human” things — but things that are decidedly suboptimal for our own financial well-being.

So, what’s the solution to this?

If loss aversion is an inherent feature of human nature, are we all destined to be poor risk-takers?

Systematic Investing 

I’ve long preached about systematic investing being the best way to overcome cognitive biases, including loss aversion.

You and I cannot “turn off” our biases. No one can — not even Jeopardy! super-champ James Holzhauer. These biases are always “on,” and therefore continually influencing our decisions in subtle ways.

The trick in minimizing the negative impact of these biases is, in my eyes, to minimize the number or frequency of decisions you have to make since each one will inevitably be affected by your biases. And that’s where having a “system” is critical.

A well-designed system will tell you decisively the action you should take, leaving you with little discretion and fewer opportunities to mess yourself up. It’s all very, well… machine-like — similar to James’ behavior on Jeopardy!

Systematic investing is all about following a rules-based approach to buying and selling investments. You decide what rules you’ll follow. But that’s a decision you make with a cool head and objective data. Then once the systematic strategy is defined and tested, you can implement it in the live market without having to make discretionary decisions daily. 

Of course, that’s exactly what I’ve been being doing with my readers in 10X Profits and Cycle 9 Alert for years now — and more recently in Secrets of a 7-Figure Trader. 

In fact, my mission is to turn you into a disciplined investing machine — one who can embrace the systematic approach and develop a discipline for following my rules-based strategies.

We may not achieve the notoriety “cyborg” James Holzhauer is, but I’m happy to see a fellow system’s guy prove the merits of our approach… and of course to continue sharing this approach with you!

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Adam O'Dell

As Chief Investment Strategist for Dent Research, Adam O’Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with minimum risk. He achieves this with his perfect blend of technical and fundamental analysis.

Tactically, he does extensive back-testing and probability-based research. It’s the ultimate partner to the exhaustive research that Dent Research co-founders Harry Dent and Rodney Johnson do in the exciting realm of the new science of investing.

Adam is also the executive editor of our hugely successful trading services, Seven-Figure Trader, Cycle 9 Alert and 10X Profits.

He has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high-profit potential.

Aiming to find the best opportunities across all asset classes, Adam expanded into the commodities, equities and futures markets. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. MORE FROM AUTHOR