'Gamble' Wisely With Your Savings

I admit that the comparisons between investing and gambling aren't completely without merit. Both involve risk. Neither comes with a guaranteed outcome. And doing either under the influence of free booze will almost certainly result in something you'll regret the next morning.

Still, despite all of the parallels, I like the odds in the stock market a whole lot better than the ones in Vegas.

Start "Gambling" on Stocks

Gamblers use all sorts of voodoo to improve their luck, such as wearing unlaundered items of clothing or carrying taxidermied bunny parts in their pockets. But investors also have a bag of tricks to reduce the uncertainty of their "bets": information.

Access to information gives investors a real edge over gamblers. It's like playing poker at a table where everyone's cards are face-up. Investors are free to look at everyone's hand: They can check out the lowdown on inside ownership, top mutual fund holdings, and so on. What's more, the dealer's hand -- company 10-K and 10-Q financial reports, conference calls, and operational reports -- is literally an open book.

Investors who do their homework -- researching each investment and playing out different scenarios to stress-test its performance -- create their own luck.

In other words, if you're not "cheating," you're not investing the right way.

Turn the Odds in Your Favor

Doing your research and making fully informed bets on stocks aren't the only ways to ensure a winning streak. Here are a few other methods for reducing uncertainty:

1. Don't gamble with money you need for your cab fare home. You've heard it before, but it's worth repeating: Do not invest any money you need in the next five years at a minimum. Make that seven to 10 years if you're more risk-averse. A friend of a friend is doing the walk of shame because he "lost" the money in the market that he was going to use as a down payment on a home. "Lost" isn't the word I'd use; this guy bet with that money -- and the gamble didn't pay off.

2. Study the table before you place any bets. Peter Lynch famously said, "Never invest in any idea you cannot illustrate with a crayon." In other words, don't put your money down until you know the business well enough to describe it in plain, easy-to-understand terms.

If you don't already have a one-sheeter on every stock in your portfolio, then draw it up now. What you want is a simple rundown of why you invested in the company in the first place, what your expectations are for the business in the future, what critical catalysts are required to achieve the growth you need, and what role this company plays in your overall portfolio. Every time you get a bad gut feeling, review this original investing thesis. Don't let your emotions drive your decisions.

3. Fold for the right reasons. There are many signs that it's time to sell. Say the CEO comes under investigation by the SEC. Or the company's products or services no longer dominate their market. Or the stock has to grow by 100% per year to justify the price. All of these are perfectly sound reasons to consider cashing in your chips.

What you don't want to do is fold your cards in an emotional state. On the Stock Advisor discussion board, Jim Mueller (TMF Gebinr) gave some sound selling advice: "Have a sell strategy in place at the time of buying. What this does is to take a lot of the emotion out of the decision. There's a plan in place (which can be changed as the situation warrants) that guides you in making that decision."

Another reason to sell -- one that's very relevant these days -- is that you've found a better place to invest. Some really solid businesses are also trading at multiyear lows. Look for companies whose stock prices have been hammered even though they still retain the competitive advantages that produced stellar returns in past years. But remember, just because something looks "cheap" or appears to be a "sure" thing, that doesn't necessarily mean it is.

So before you place your bets, heed the three simple rules above. To invest with anything less than your full due diligence really is gambling.

Fool.com writer Dayana Yochim plays a mean game of “Go Fish,” but her winnings aren’t even enough to buy a mocha frappuccino.