Maybe it’s all just a big gam­ble

But that’s not nec­es­sar­ily bad

Finweek English Edition - - Private Buy - SHAUN HAR­RIS shaunh@fin­

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.

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