When talking about making investment decisions, Warren Buffet once said something to this effect: “Think of yourself as having a card with twenty punches in a lifetime, and that every financial decision represents one punch.” In other words, in Buffet’s view, there are limited opportunities for making good investment decisions in life and that people should be properly prepared to make them—such as when planning for life’s major events (marriage, the birth of a child, etc.)–as well as when checking off personal “bucket list” items (an Alaskan cruise, African safari, that sort of thing). Last month, I had the opportunity to punch my “life card” when I traveled to Las Vegas to participate in a World Series of Poker event.
Back in January, I qualified for it by winning an area competition. (I’m not an expert player, but I find poker to be an enjoyable way to spend an evening.) So I decided to embrace the opportunity and proceeded to read a few books by poker experts, and browse some poker magazines in my spare time. The more I read, the more it occurred to me that preparing to play in a WSOP event is similar, in principle, to preparing for investing. (Let’s be clear, I’m not comparing investing to gambling; I’m comparing the preparation for playing in a sanctioned poker tournament to the preparation for proper investing.)
For example, in a game of “Hold ‘Em” (the style of game I played in Las Vegas), you have to make certain “investment” decisions with a limited amount of available information. In each round you’re given only two cards and are forced to decide whether to pay more money to continue playing or to “fold” and wait for the next round. Being good at math can help–knowing the odds allow you to make better, more informed decisions. Moreover, each two random cards dealt to you has an expected “rate of return,” similar to a stock in your portfolio. The “value” of the cards changes as play evolves and as one gathers more information. As long as the expected “net present value” is greater than zero, you continue to play.
The poker books that I read emphasized that there are multiple ways to play the game and that one particular way is no more correct than any other. For example, there are “value investors” who play very few hands, waiting for the ones that have a high probability for winning the pot, as well as “momentum investors” who aggressively play a lot of hands. In my case, it came down to picking a style suited to me and calculating the math as best as I could. After months of preparation I felt I had that part of the game down. I convinced myself that as long as I played mathematically correct, I’d be able to hang with the pros. After all, they get just two random cards like everyone else.
There was an air of electricity in the room where the event was held. Imagine a conference hall the size of Cobo Center, filled with poker table after poker table for 1,914 participants. Giant TVs– seemingly everywhere–projected news and information about the event, as well as professional baseball and soccer games going on simultaneously. The odor in the room was a strange combination of air freshener and cigarette smoke. Also, it seemed as though the sound of chirping crickets permeated the place as players “shuffled” their stacks of chips.
My table slowly filled with players. I did my best to stay calm and focus on the game. It didn’t take long for me to figure out why the preferred apparel for a poker player is a long-sleeve hoodie. The temperature in the conference room was less than 65° despite it being 115° outside. Eventually, the seat next to me was taken by a player I recognized from one of my poker magazines. The last empty seat was finally occupied by another professional. The player to my right told me he had a degree in applied math. I quickly realized that this was not going to be a cakewalk.
After several hours, I found myself playing for a particular pot that had grown larger than I felt comfortable playing for. I held a decent hand, but I wasn’t particularly confident that it was a winning one. And there wasn’t much chance of improving it. After placing a large bet, an opponent “raised me all-in.” That meant I had to place all of my chips into the pot and put my tournament life on the line…while holding a “marginal hand.” Was he bluffing? I glanced across the table for a clue in his eyes, but found myself staring at a stone-cold statue. It was in that moment that the difference between an amateur who thinks he knows a lot about playing poker and a pro who actually does know a lot about playing poker became clear to me.
Once again, the investment analogy seemed obvious. An individual investor can read books about all the great investors and feel confident in his or her abilities to shine in the market. Just as in poker, investment choices are finite and usually move in the same direction. Morningstar recently conducted a study of the mutual funds they follow, along with the returns of individual investors on those same funds. In the 10-year period ending December 2013, the mutual funds followed by Morningstar returned–on average–7.3% per year. The typical individual investor investing in those same funds returned—on average–just 4.8% per year. The every-day investor tends to make the wrong decision under pressure. He or she has a tendency to flock to what seems to be working at the moment, or flee in terror during downturns…usually at the worst possible time. To compound the problem, amateur investors often fail to have a long-term plan for handling investor variance, to ensure that they can stay financially solvent during good times and bad.
Though my tournament life didn’t last long after I folded that marginal hand, I enjoyed the ride and learned a lot along the way. I’ll continue to play poker recreationally, but I’m certainly going to keep my day job. I’m not sure how poker pros handle the variance of returns which probably sounds ironic since in the investment world, we’ve witnessed two “once-in-a-lifetime” market declines in the last fifteen years. Still, the poker pro makes money by taking other people’s money. It’s a zero-sum game. Everyone can make money in the market. The key is careful planning, patience, and the willingness to continue to invest in the face of adversity.
My tournament experience was another reminder of how appreciative and humbled I am to have the opportunity to help clients navigate their own journeys.
Chief Investment Officer