Maybe it’s all just a big gamble
But that’s not necessarily bad
SOMETIMES, like now, the JSE looks like nothing more than a big casino. Except the odds are probably better at a casino. But from what I’ve seen at casinos, gambling – at least by the clever people – isn’t just about luck. Some people manage to win pretty consistently, usually by following some system or the other. And that’s not very different from successful investing.
So I was interested to see a report by Matthew de Wet, head of investments at Nedgroup investments, noting the similarities between successful fund managers and professional poker players. Certainly two shared qualities seem to come through: discipline and patience. De Wet says he’s always been against gambling – to the point where he’s never even bought a lottery ticket. Well, the odds are stacked against you in the lottery, not just because of the millions of number combinations but also the good chance some corrupt official is rigging the whole thing.
But De Wet says: “I had simply assumed poker was another means for the statistically challenged to give away their hard earned money to casinos.”
De Wet says he learned, to his surprise, that professional poker players aren’t gamblers. “Like active fund management, poker is also a zero sum game. In order to win, good players must inflict their profits as losses on their competitors. To do that consistently they have to be more skilled than their fellow players.”
That’s where time in the market, or the poker game, comes in. De Wet notes that like top fund managers, good professional poker players generate significant profits over longer periods but have mixed results over shorter periods, due to the “random element” or luck of the cards dealt. It’s the same with fund management. “Although, over shorter periods of time, even the most successful fund managers underperform the market, they tend to float to the top over a longer timeframe.”
But what does that imply about successful fund performance over the short term? That the manager is just a lucky gambler?
De Wet says another shared trait is betting big when a poker player and fund manager have a high level of conviction. Here’s where discipline and patience come in. And successful poker players have an ability to “read” their opponents. Much as, he says, top fund managers must be able to read (at times misleading) information about company prospects and be able to judge the market. And they need to be smarter than their competitors.
De Wet notes top poker players are clever people, often with doctorates in psychology, computer science and mathematics. So are fund managers, with CAs, CFAs and MBAs.
So we get them together for a poker tournament. At the same time both camps would select investment portfolios. Those can be updated every week or so when they meet for the next game of poker. The tournament would have to run for at least three years to fairly judge investment performance and the poker games can be tallied up weekly. What a great TV series.
Wonder who the overall winners would be? My money would be on the fund managers to win the poker. And investment performance? I wouldn’t want to bet on that.