Playing poker yesterday really reminded me about the nature of risk. In poker, you can decide if you are going to fold, and maybe taking in a small loss too. However, in hindsight that decision to fold is smart when you could have lost more if you didn't fold. Sometimes, its better to 'fold' when you're given a bad company. You were 'dealt' that 'hand' and there's nothing you can do at the moment!
In poker, patience has its rewards. The winning strategy here is to continue folding until you start off with a card that is highly favourable. That way by avoiding all the big losses, you end up with one big gain, which is often more than enough. My trick in poker is to never ever gamble unless the odds are with you. That strategy has proven successful to me. And often is rewarding just by having a little patience.
Doesn't that remind you about investing? We put our hard-earned money into a company only when we believe strongly about that company. We are happy to pass on hundreds of opportunities just to be able to say yes to the one worthwhile chance. That being said, investing does have its gambling characteristics after all. During the poker game, it rewards you to be able to read psychologically the actions of others. In that way, it helps too. If you're anticipating a raise if the person's hand is good, then he/she will definitely raise the bet to heighten his/her winnings. That way you can tell about a person when playing poker.
Likewise, when we invest, try not to go against other value investors. Of course, each of our valuations are different. It certainly pays not to think ourselves as the best too. If Warren Buffett or some other value investor is the buyer, you would do good not being the seller. Its not to say that he is right all the time, but that he is right most of the time. So, the odds are against you. The best is to do your homework well and if there really is enough evidence to back up your suggestion, then only is it alright to be on the other side of a trade of a value investor.
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3 comments:
Great thought!
"Its not to say that he is right all the time, but that he is right most of the time. So, the odds are against you."
I agree that investing should be approached with statistical model of thinking in terms of odds and probabilities.
If the probability of losing against Warren is 80%, and then suppose we had transaction against him sufficiently often (like 10,000 times), it would be fair to expect winning around 2,000 times and losing around 8,000 times.
There are times when we'd win, but most of the time we'd lose. So chances are the netting result of losing. ^_^
BTW, I deleted and reposted the comment with the quoted sentence of yours that 'Tings!' on my head.
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