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Investment Lessons Learned from the Poker Table

“I don’t know.” These three words don’t inspire a lot of confidence in the messenger and probably will not get me invited onto CNBC, but that is exactly what I think about the topic I am about to discuss.

I received a few e-mails from people who had a problem with a phrase in one of my blog posts this fall. In that article I examined various risks that other investors and I are concerned about. The phrase was “the prospect of higher, maybe even much higher, interest rates.” These readers were convinced that higher interest rates and inflation are not a risk because we are not going to have them for a long, long time, that we are heading into deflation. These readers basically told me that I should worry about the things that will come next, not things that may or may not happen years and years down the road.

I am pretty sure that if that phrase had addressed the risk of deflation and lower interest rates ahead, I’d have gotten as many e-mails arguing that I was wrong — that we’ll soon have inflation and skyrocketing interest rates, and deflation is not going to happen.

I don’t know whether we are going to have inflation or deflation in the near future. More important, I’d be very careful about trusting my money to anyone holding very strong convictions on this topic and positioning my portfolio on the basis of them.

Any poker player knows that the worst thing that can happen is to have the second-best hand. If you have a weak hand, you are going to play defensively or fold (unless you are bluffing) and likely won’t lose much. But if you’re pretty confident in your hand, you may bet aggressively (god forbid you go all-in) — after all, you could easily have the winning cards. Four of a kind is a great poker hand unless your opponent has a straight flush.

Generally, the more confident you are in an investment, the larger portion of your portfolio will be placed in that position. Therefore superconvinced inflationists will load up on gold, and superconvinced deflationists will be swimming in long-term bonds. If their predictions are right, they’ll make a boatload of money. If they’re wrong, however, they will have the second-best-hand problem — and lose a lot of money.

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  • POST

Well written and thoughtful - thank you!

Jan 13 2015 at 12:30 PM EST

Tere Throenle
 

Your second best hand analogy is useless for investment purposes. It just happens on occasion. Better question is how to you protect yourself from a second best hand scenario, or better yet, a bad beat? Or multiple bad beats in a row? Bankroll management. I haven't met a poker player yet who went broke with proper bankroll management and discipline.

}>>>

Jan 12 2015 at 9:08 PM EST

solly cholly
 

Dear Roger,

I completely understand why you wrote this comment. After you mentioned it, I read the Pilgrims Pride write-up; and you are right, we are both using the “second-best-hand” analogy, and the Pilgrim’s Pride piece was published on October 21, 2014, a month before my article went live. Since you don’t know me personally, your conclusion is logical. But let me be perfectly clear: I did not “rip” my article from the post on Value Investor Club!

1. I wrote the first draft that mentioned the second-best-hand reference a week before the Pilgrim’s Pride article was published. My “Investment Lessons Learned from the Poker Table” was published in Institutional Investor on November 13th; however, I sent my first draft of this article to Michael Peltz, editor of Institutional Investor, on October 10th at 10:03 am, 11 days before the Pilgrim’s Pride write-up was published on Value Investor’s Club.

Here is a partially redacted screenshot of that email https://dl.dropboxusercontent.com/u/6010227/Webshare/Email%20to%20Michael%20Peltz.jpg .

2) Though I am a proud member of Value Investors Club, I did not read the Pilgrim’s Pride write-up until after you mentioned it.

Why I am spending my time answering this comment? Two reasons:

1) My reputation and my accent are all I have. I am not concerned about losing my accent, but my reputation is very important to me. As Buffett puts it, reputation takes decades to build and minutes to lose.

2) As a person who creates a lot of content, I would not want my content to be bluntly plagiarized.

Best, Vitaliy Katsenelson

Dec 11 2014 at 6:31 PM EST

Vitaliy Katsenelson
 

You should acknowledge somewhere here that you largely ripped off this post from a recent writeup on Value Investors Club on Pilgrim's Pride.

Dec 11 2014 at 12:06 PM EST

Roger
 

"Ignorance more frequently begets confidence than does knowledge" Charles Darwin

This is one of the best articles advocating diversification that I have ever read.
Thanks

Dec 11 2014 at 10:59 AM EST

Tony
 

Wow ken. You invested a lot of emotions in that....

Dec 11 2014 at 12:05 AM EST

Assafg
 

Question by you: When was the last time every major economy was this over-levered and overstimulated?

Answer: At the end of WWII

And your answer of "never", is most definitely wrong!

Since I warned you about the risks of deflation, oil has dropped in price by 25% !!!!

People who are paid to KNOW, cannot simply sit back and say they have NO CLUE!

When the most important commodity in the world drops in price by 25% over a period of a few weeks, the CURRENT situation surely canNOT be called inflationary.

You position is: I have NO clue!

I suggest you read this: Marc Faber= A Broken but Noisy Grandfather Clock

https://docs.google.com/document/d/1Lw2qAMEFj8kDAzeOmnGHeCN9WXMZBmXi_Fk9fbj0YQQ/pub


EVERYONE constantly discusses the US FED's 4 Trillion balance sheet....

How about discussing the FACT that the most valuable and important commodity in the world just decreased in value by 25%?

After WWII most of the largest economies in the world were smoking heaps, with the exception of the U.S.

Clearly the world's largest economies are in far better shape than after WWII.

The U.S. Govt was much more leveraged against GDP than today!

Consumers are far more leveraged today, but nobody wants to discuss them... because the "sheep" are to busy talking about the FED.....

Nov 13 2014 at 8:20 PM EST

Ken Luskin