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Passive vs. Active Management:
How investing is – and isn't – like a game of Texas Hold 'Em (cont.)
[Download Printable White Paper]
"Nobody can know what the "river" card will be
and you can't know what a stock price will be tomorrow.
But in the long run, if you correctly figure all of the
probabilities, you'll always bias the outcome in your
favor," Pete said.
We've been waiting for this moment in the essay to
make a revelation that shouldn't surprise you it turns
out that Pete is an index investor, not a stock picker.
His reasoning is eminently logical:
Rule No. 2:
Intuition
big bets
timing
are overrated.
Over time, you win by consistently making good
decisions.
"The really good players talk about making great
'lay-downs' as much as pulling an Ace on the 'river,'"
said Pete. "It takes guts to play poker. But to win, it
takes a bit of well-managed cowardice too."
The name of the game is consistency, making good
decisions, correctly analyzing all the available
information, calculating the pot odds and making only
"value bets"
that's the only way to factor in the
occasional bad beats.
(Sort of like building a diverse, properly-allocated index.)
This is much easier said than done. The challenge
the slippery slope for poker players is one that
investors know well: emotion. In poker parlance,
a player who's "chasing the last hand," forcing bets,
just reacting, is said to be "on tilt."
(So in both a literal and figurative sense, an unbalanced
investment portfolio also is "on tilt.")
Pete is keenly aware of the seductive market-timing
temptations of poker. And scrutinizing other players for
"tells" is vastly overrated, he says.
"The only thing more pointless is trying to find 'tells' in
the stock market, which is what brokers are doing
nonstop
24/7. That's not for me. Way, way too many
unknowable variables. You're better off playing poker
than picking stocks."
Well said.
Here are few more of Pete's rules of the road. They
make a good map for any poker enthusiast
or investor.
Never act on emotion.
When you think long, (usually) you think wrong.
Never chase a bad hand. Let it go.
There's no such thing as a sure System for winning,
only for losing. (For example, always playing
aggressively.)
Know your limits.
(end)
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