I was recently reading an article from the president of Saber Capital, John Huber. John is a manager I admire a great deal and I have learned a lot from his writings over the past few years. His recent article illustrates a very important concept for investors to understand and that’s why I’m going to share it with you.
The Game of Chess
There are games like chess where the outcomes are almost pre-determined. The better chess player will win almost all of the time. Barring a major mistake, the person with the greater skill can beat the less skilled player because the player has access to all of the information they could possibly need to make the right decision. Therefore there is always certainty in what is the correct move at any given time. The more skilled player is going to know the correct move more often than the unskilled player and therefore they will win.
The Game of Poker
Poker on the other hand is a game where amateurs can and do beat professionals all the time, and this can happen even if the professional player makes no mistakes. A pro can make every right move and still lose because in poker there is a lot of information that is simply unavailable to each player. No player knows what cards will be drawn from the deck and while a skilled player can decipher clues as to what cards his or her opponents’ may have in their hands, they are never going to be 100% certain of that information either. So there is a lot of important information that is unavailable to the player which creates uncertainty. And that uncertainty means that a good player must deal in probabilities and not certainties.
Dealing in probabilities means that you can make the right choice (the choice which gives you a higher probability of being successful) and still lose.
Life is a lot more like poker than it is like chess. In life there is lots of information that is unknown to us and may even be unknowable. This creates a lot of uncertainty in our decision making.
There is a great and famous example of this from Superbowl 49 in which Pete Carroll, the coach of the Seattle Seahawks elected to throw a pass on 2nd and 1, while at the Patriots goal line. That was despite Seattle having the best running back in the league in Marshawn Lynch and them only needing one yard to win the game and the Superbowl. Unfortunately for the Seahawks the pass was intercepted and the Patriots sealed the win. The play call is now one of the most highly criticized play calls in football history.
But was it the wrong decision by Carroll? The result was obviously horrible (for the Seahawks), but that doesn’t mean the original decision was wrong. Like we said, life has uncertainty to it, so the correct decision with a higher probability to win could still result in a bad outcome. The argument Pete Carroll made (and still makes to this day) is that the pass was the correct decision. If the pass was incomplete, the clock would stop and Seattle would have two more chances to run the ball for the winning TD. Thus throwing a pass probably preserves an extra chance to score. It was also extremely unlikely that the pass would be intercepted. None of the previous 66 passes from the 1 yard line that season had been intercepted. So the chances of the eventual catastrophic result were very very low.
It is very easy to say with hindsight that Carroll made the wrong choice, because the result was horrible (again, for the Seahawks). However I don’t think he made the worst decision in a superbowl ever. I won’t go so far as to say he made the correct choice, but I think it was a lot closer than most people would admit.
Investing is often like being Pete Carroll picking plays in the Superbowl. We often make decisions based on probabilities and uncertain information and even when we make the correct choice, we can still lose money on it. Similarly, we can make mistakes and get lucky and still make money on a bad choice.
What we try hard to do is to consistently be right in our decision making regardless of what the results are. A bad result which happens despite a good choice is an unlucky break, but it shouldn’t impact your long term performance so long as you continue to make correct decisions. Similarly, you can’t expect lucky breaks to continue forever, even if you make money on a bad investment. Like I always say, If you run through a fireworks factory with a lit torch, and you survive, it doesn’t mean it was a good idea. Enough bad ideas will kill you, just like enough good ideas will make you successful.
The saying, “better to be lucky than good” has some folksy charm to it, but I’d much rather be good than lucky. Over time, with investing, the good investor will be successful, but the lucky one won’t, even if investing (and life) is more like Poker than Chess.
- Craig White, BA, LL.B., CIM®
Craig White is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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