Last Updated on December 29, 2021 at 4:58 pm
Ever heard someone say “investing in the stock market is like gambling”? Well, at least in part, it is more accurate than we care to admit. The mental aspects involved for succeeding in poker (gambling), stocks and life (the biggest gamble of all) are one and the same argues Srivatsan in this article. Srivatsan, as many readers may know by now, is a regular contributor and his most famous pieces are: Forget the next Infy; Can you identify the next Satyam? And the more recent viral hit: Forget Buffettisms/Mungerisms: try these 2000-year-old personal finance tips!
Srivatsan who would only like to be referred to as a “long-time reader” of freefincal is responsible for adding the Earnings power box in the stock analyser: Automated Earnings Power Stock Analysis With Screener.in data. He has discussed, If BJP loses Lok Sabha Election 2019, will the stock market crash? And pointed out, Want financial success? Budget time & energy before money! Now over to him.
0 Zero-Sum game – The basics
A zero-sum game is one where for one person’s win is precisely equal to another person’s loss. The total involved remains the same, but it gets redistributed.
In poker, for you to win a hand, your opponent(s) has to lose. The pot remains the same. The winner gets it all.
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In (secondary) stock market trading, (e.g. options and futures) for you to buy a stock, there should be another person willing to sell. It is funny and ironic that a person buying a stock at a price has ‘n’ reasons and a person selling the same stock at that price has ‘n’ reasons.
In life, everyone has the same 24 hrs in a day and as the cliché goes, “Kuch paane ke liye, kuch khona bhi padta hai”. Life is all about managing tradeoffs between energy, time and money. (Shameless self-publicity: Refer my previous article here at freefincal)
1 Winning is not granted, and it is never a continuous, monotonic and linear curve
Every beginner in poker and stock market (and life) starts out expecting to win big from day one and take winning for granted. It is usually never the case. Almost 99.99% of us burn our fingers in poker and stock market before they get serious and start learning (yours truly included).
Life especially is a highly non-linear, discontinuous journey. Sadly In India, we are conditioned to think it as a step by step linear progression (just like LKG, UKG to XII, 1st year, final year, etc.). If somebody says, “I am taking a break”, we wonder what’s wrong with that person. Because a break breaks our continuous linear mental model 🙂 Take a look at this graph in Figure 1. Seems familiar? Any guesses?
That’s a poker pro’s winnings graphed over some 50k hands. It is the same trend exhibited by your stock investment over the “long term”. Life too goes through stages of meteoric rise, precipitous fall, a stagnant phase and resurgence. Rinse and repeat.
2 Knowledge is not Power; “Applied knowledge” is Power
You might have heard these sayings. Everyone knows the following:
Poker: Bet your good hands, Check your middling hands, and Fold rest of the crap.
Stocks: Buy Low, Sell High
Life: Study well, Work hard, Success will follow.
Simple; evident and easy! Am I right?
Poker: Depending on the board, villain, betting patterns and the money at stake, you have only a fair idea of what is a good hand and what is not. Having just an Ace high on a monotone connected board vs three players is usually worthless, but sometimes it does hold up to win. It takes quite a bit of skill and knowing opponent tendencies to decide what is good and bad.
Stocks: Nobody knows or can predict the true bottom or the true high. A bottom or high is usually known ex-post-facto only. Sometimes a low can be a local minimum that can fool you into buying! (For example, pink papers may exhort stocks hitting 52 weeks low as the time to buy. Check how many stocks are low if you graph for the past one year, but way higher when you consider last 3-5 years!)
Life: It is extremely critical what you study thoroughly, where and how you work hard and how long you are at it. Those are the predictors of success. There is a reason conventional wisdom is well, conventional. Refer to point 10.
3 So-called “Intelligent and Smart” people are the biggest losers
Poker: Go to Las Vegas and see who the biggest losers on a poker table on any given night are. You will usually encounter millionaire investment bankers, Math PhDs, neurosurgeons, nouveau rich youths in the 20s who just cashed their startup IPOs. You will find them trying to pull outrageous bluffs, super fancy moves, trap plays and going broke.
There is a famous quote in poker circles and stock markets:
50% of the players are losers. Then another 49% are liars.
Stocks: How many of you know Isaac Newton? He is the guy who made my entire life miserable right from high school physics all the way to my master’s degree. Of course, he is the annadata of this blog owner, so I cannot throw solid projectiles defying gravity from inside the structures built with supercooled liquids :). (My inner Shashi Tharoor is ecstatic!)
How many of you are aware of the South Sea bubble?
Jason Zweig writes “…Sir Isaac Newton was one of the most intelligent people to have ever lived, as most of us would define intelligence. But, in Graham’s terms, he was far from an intelligent investor. By letting the crowd override his judgment, the world’s greatest scientist acted like a fool…” This quote summarises beautifully.
Just as many smart people fail in the investment business as stupid ones. Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental, truths – Peter Cundill
Life: We see this time and time again, right? These books may help
4. Smartness is EQ over IQ
Poker: There will be long periods where in spite of doing everything right and playing perfectly, you will continue to lose or barely break even. This can stretch even up to 100,000 hands or 6 months. There will be days you will lose your stacks four times in a row to lucky idiots, or your bankroll gets shot by 20% because you lost a big pot to a suck out on the river. There will be sessions where the cards you fold will actually end up being the winner of a big pot.
Can you remain calm, focused and still bring your A-game?
Stocks: Same concept. Stocks can remain flat for a long time and explode as a multi-bagger. Can you still hold on to your conviction? When everybody at your work is “investing” in multi-beggar stocks with sh*tty fundamentals during a bull-run and bragging about 10x returns in 3 months, can you be resolute?
Life: The person who can execute a “இடுக்கண் வருங்கால் நகுக.”
Smile during the time of trouble (kural 621) is the ultimate Muqaddar ka Sikandar. For more Kural gyan see: Forget Buffettisms/Mungerisms: try these 2000-year-old personal finance tips!
5. No one way is “the one and only” way
Poker: A player has a choice to play any or all of Hold’em, Omaha, Razz or Seven-card stud under no-limit or pot-limit in a tight, loose, passive or aggressive style. There are several games and several techniques to make money. No one game or style is superior to any of the other as long as you end up making money.
Stocks: Again, you can be a value, growth, turnaround, cigar butt, contrarian, momentum investor, buy and hold guy, day trading guy, chartist, going long, selling short, using algorithmic trading in options or futures. There are plenty of avenues. Shouting from the rooftops that value investing, buffettisms, buy and hold till infinity is the Holy Grail to make money is misguided propaganda. It all depends on your comfort level, capital at disposal, risk tolerance and expertise.
Life: There are plenty of options to choose how to live your life your way and not by someone else’s rules or doctrine (Rajnikanth fans – Yell the punch dialogue three times). Your life is not doomed if you are not an engineer or a doctor or a Forbes 30 under 30 by 25J. And this is coming from somebody who has gone on the road frequently travelled, the oft beaten path, and beaten it to such an extent that no grass will ever grow in it!
6 Know when to let go; Cut your losses
Poker: Knowing when to fold is what great players do. This will save you lot of money that you would have otherwise lost by playing. You might be holding pocket Aces (the strongest hand). But if a passive player who was meekly calling your bets all along suddenly wakes up and raises you on an innocuous board, get ready to ditch them. You are beat. No point throwing bad money after good. Fold, move on. There will be other hands, other players and millions of opportunities. That was not the one.
Stocks: You did tremendous research, your screener query is perfect, you know every word from last ten years’ annual report of that company, you gathered scuttlebutt, you attended AGMs, earning calls and your valuation excel sheet might put Aswath Damodaran to shame. After all these, your purchased stock tanks and goes downhill inexorably – Sell that da*n sh*t. Let it go. Do not average it down. There will be other opportunities.
Remember Abhimanyu? He perfectly knew how to get in but sadly didn’t know how to get out. Same story with stocks. The resources that talk about when to sell are very few.
Life: Be it a memory, job, relationship or a person, if at some point you realise it is not working and there is no scope in the future – Let it go. No point clinging on to past glories or what has been. Focus on what needs to be. Do not get overwhelmed by sunk cost fallacy. Again, there will be plenty of opportunities.
7 Long term decision making Process vs Short term results orientation
Poker: Every poker pro worth his salt lives and breathes +EV (positive expected value). Making decisions (bet/call/fold) that maximises the expected value over the long term. Meaning: Over 100,000 or more hands if you stick to this kind of decision-making process or thinking, you should show up considerable profit. You will lose a bunch of hands here and there, but you will also end up in vastly better shape compared to your opponents.
Stocks: Read the poker section again. Does it sound familiar? Decision making? Process? Long term? Or can you identify who said this quote?? If you could not, then you are not a value investor. You are a curse to the tribe! : P
“…investing is a unique kind of casino — one where you cannot lose in the end, so long as you play only by the rules that put the odds squarely in your favour…”
Life: Heard of delayed gratification? How many of us have done this – Show of hands please – Job hopping just because of a 30% increase from current package disregarding every other hygiene and motivating factor?
8 Fooled by Randomness & the Black Swan
Poker: The weakest hand in poker 72o beats the strongest AA, about 12% of the time. It happens. Even a tortoise occasionally beats a hare.
Here you are happily marching along with fantasies something like this, this and this. Then this happens. Well – you cannot do anything about it.
Stocks: Yes, we all have fantasies of proudly saying “I am a blogger/writer/investor”; “I quit my full-time job to meditate in the Himalayas with a lake view and I write about scaffolding for mentals and models”. I guess that would not be the case in 1929, 1987, 1999, 2008 and the next 20xx???
Life: I am sure you have one of your near and dear ones get the Big C, or you know people who just collapsed and died due to a ruptured cerebral aneurysm. Yes. Sh*t happens. It is excruciatingly painful when it happens to you or someone close to you. Invariably the first reaction is people ask themselves, “Why me?”
This is probably the reason Indian philosophy conveniently boxes all inexplicable random events with no apparent causality to a term called “Fate”.
9 Learner vs Grinder mentality
Poker: This is akin to what management gurus like to call “promotion focus” vs “prevention focus”. A Learner is one who starts at very low-level stakes, learns the stuff at that level, plays, wins and gets better, moves up, take shots to play and compete at higher and higher stakes versus tougher players. A grinder is someone who is comfortable and happy playing online 16 tables at a time, playing a particular level, 8hrs a day and making that constant win rate every day.
Stocks: Person A has ten lakhs to invest. He puts it in nifty 100 equal weight index funds. Person B puts the same amount spread across five stocks he has done his due diligence on. Who is the grinder? Who is the learner? Who is the grinder between Joel Greenblatt vs Buffett?
Life: Do you now understand why it is called the daily grind? Do you like to grind your way inside your comfort zone or plunge your feet into unchartered waters? Is your work experience a one year of experience repeated n years or vice versa?
Is your life philosophy this? or
This: Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do – Mark Twain
Again, absolutely nothing wrong in being either. But be true to yourselves.
10 Scale the knowing-doing-being ladder
Poker: When a man with money meets a man with experience, the man with experience leaves with cash and the man with money leaves with experience
Stocks: If you don’t study any companies, you have the same success buying shares as you do in a poker game if you bet without looking at your cards. Any guesses who said this?
Life: Practice does not make perfect. Perfect practice makes perfect. I am not saying a smart cliché that comes with one of those BS motivational WhatsApp status messages.
Read “The role of deliberate practice in the acquisition of expert performance by Ericcson, Krampe and Romer” or what Malcolm Gladwell called his famous 10,000-hour rule in Outliers book. Point to note: It is the deliberate practice that counts and not the 10,000 hours.
Example – Tendulkar, Michael Jordan, Mozart, Beatles, Buffett
PS: If you reached here after 2300 words, are you a learner or a grinder?
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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