By Morgan Christen
CFA, CFP, CDFA, CEO and CIO
If you ever want to check someone on their belief, ask them if they “wanna bet.” A sure bet will crumble when forced to answer that question. Suddenly, there are holes in thesis.
Professional poker player and holder of a World Series of Poker gold bracelet Annie Duke discusses how “life is like poker, not chess” in her book Thinking in Bets.
Annie is not only a poker player but quite the expert on decision making, psychology and game theory, having pursued a Ph.D. at the University of Pennsylvania. In fact, after reading the book, you can draw parallels in investing.
Investing is more akin to poker, not chess. Chess can be mapped; there are set outcomes based on a move. Not so in poker or investing. You can’t map out the markets and one move does not dictate the next. Let’s delve into the parallels.
Texas Hold ‘ Em
One of the more popular forms of poker, Texas Hold ‘Em is where Annie excelled. To play, two cards are dealt to each player face down with a series of five community cards dealt in three stages. After the initial cards are dealt (2 cards), the first series is the flop (3 cards), followed by the turn card (1 card), then the river (1 card).
Betting happens at all these stages; ultimately a player is seeking the best five cards. For those of you who have played, you know that a pair of aces (85% chance of winning) is the best starting hand, with an unsuited two and seven being the worst. But the best start does not guarantee you win as there is still a 15% chance of losing while starting with the aces.
Poker players are comfortable with uncertainty, in fact, they embrace it. Sit at any poker table and you will see that, over time, an experienced player will win more often than a novice. That does not mean that a novice can’t take out Annie Duke, but experience allows the player to make better decisions and narrow down the possible outcomes. Giving uncertainty a big hug helps you become a better player (and investor).
As allocators of capital, we constantly evaluate possible outcomes under uncertainty. Without uncertainty, there would be no return. Ask a holder of a US Treasury Bill how they fared the last few years. Last year we have sat at the table and watched Robinhood, Reddit and the Wall Street Bets traders take on the professionals and win many times.
These newer traders started to suffer from what some poker players get optimism bias – the belief they are less likely to experience a negative event. 2021 has challenged that optimism and the crowd now is more subdued. Those of us who have experienced the manias and wicked retreats embraced these events, continued investing and rebalanced back into and out of them.
A while ago we looked at our investment cards and determined we did not want to place a bet in the Emerging Markets, namely China. We looked at the possible outcomes and thought the risk/reward was not warranted. We were playing a game against a market that doesn’t play conventional cards.
This year we have watched China crackdown on some of the country’s hottest sectors. Shares of Tencent dropped as China ordered them to give up their exclusive music licensing rights. To quote a Goldman Sachs analyst, “even when you think China risk is priced, it can get worse.” Even last year’s rock star, Cathie Wood, has pulled the plug on China.
Starting this year, we were dealt a great starting hand. We began with low interest rates and a surge in the economy. Second quarter had an average flop with increasing inflation, increasing interest rates and the meme stocks/crypto pulling back.
We have finished the first month of the third quarter, our “turn card” has been the geopolitical card with the crackdown in China. We have not pushed all our equity chips in as we appreciate uncertainty, however we remain invested in our current “pot” and await the river card.
The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.