Doug Buchan with Buckingham Strategic Partners, 3/2/2020
Allan Rufus, in his book, “The Master’s Sacred Knowledge,” says, “Life is like a game of chess. To win you have to make a move. Knowing which move to make comes with insight and knowledge, and by learning the lessons that are accumulated along the way.”
The phrase “life is like a game of chess” has become a well-worn adage, and, like many other old adages, this one has some significant flaws.
You see, in chess, all the right moves are knowable. They may not be known by you or me, but they are knowable. And this is the significant error when comparing life with chess.
Life is much more like a game of poker. In poker, there are four main scenarios:
You have a good/great hand, and you make correct decisions.
You have a good/great hand, and you make incorrect decisions.
You have a bad/terrible hand, and you make correct decisions.
You have a bad/terrible hand, and you make incorrect decisions.
Here’s the conundrum about poker (and life and investing): You can hold a great hand and make all the correct decisions, and you can still lose. It happens more often than we all may like to think. And, while such situations are painful for everyone, how many people react or potentially change their behavior based on these unlucky instances can be far worse than the original unlucky occurrence.
Let’s look at an example:
In chess, you virtually always sit in two of the table’s four boxes, i.e., good decisions lead to good outcomes and bad decisions lead to bad outcomes. In poker and life and investing, we sit in all four quadrants.
As difficult on the psyche as it can be to have an outcome in the table’s top right quadrant (good decision, bad outcome), I believe the bottom left quadrant (bad decision, good outcome) can be more harmful for folks in the long run. Especially if they don’t realize they’re in the bottom left quadrant (and I suspect that most don’t).
For starters, if your luck does run out, the results can be disastrous. Think back to our table. Maybe a driver assumes he has a 99% chance of running a red light and getting away with it, and maybe that driver is right. But the odds of successfully running two red lights fall to 98%. Three lights? 97%. Do it 75 times and you’re down to less than a coin flip. There’s a fine line between calculated risk and reckless behavior, and the slope can become slippery.
Plus, personal experience can drastically affect one’s perception of risk, and those experiences can lead us to take on too much or too little of it. So, it’s critical to be self-aware of how our personal experiences shape us.
A Few Takeaways
Looking inward at the way we make decisions can teach us some valuable lessons, whether we’re talking about poker or life or investing. First, you need to weigh the severity of a negative outcome in addition to the probability that it will happen. I’ve often heard folks talk about how they’d like to spend their last dollar while taking their last breath. They know they can’t take it all with them to the Pearly Gates. But, what’s worse? Passing away with gobs of excess money, or knocking on your kid’s door in your 80s because you’re out of cash and moving in? Having some financial buffers is wise.
Life insurance is similar. Sure, the actuarial tables suggest that I pay a little more money in life insurance premiums than the (thankfully) low odds of me passing would seem to require. Yet, I happily write that check every month because, even though the probability is low, the severity of a negative outcome (my premature death) is extremely high for my family.
Second, in poker, it’s OK to fold sometimes. In fact, it’s more than OK; it’s advised. It’s rarely culturally acceptable to tell others to just quit something, whatever the thing happens to be. But, good poker players “quit” all the time. This, of course, is known as folding. When the odds and chips are stacked against you, folding is a wise strategy.
It’s the same in life. There’s often a huge opportunity cost in holding a bad hand. That bad hand might be a job you hate or a toxic relationship or a financial situation that puts you under a load of stress. Sticking with these things creates negative expected happiness, negative expected self-worth, and negative expected real wealth. Don’t be afraid to fold and move forward. Third, be wary of concluding too much from any single outcome. Having a process for making decisions will help prevent you from impulsively reacting when unlucky outcomes occur. In that vein, I believe there are three critical aspects of wise decision-making.
Discipline: In poker, the discipline to not chase a juicy pot when the odds aren’t there for you will lead to superior outcomes. In investing, the discipline to not simply chase the high-flying investment of the hour is vital to superior long-term returns.
Patience: In poker, you will experience long stretches of bad hands. Patiently waiting to play only good hands – even when you’ve seen others win with bad hands – is key to long-term success. In investing, you will experience periods where a diversified portfolio feels bad because others – who are less diversified – are “doing better.” Ignoring the noise and staying patient is the second characteristic of successful investors.
Faith: In poker, without faith that you have the proper strategy, your discipline and patience will eventually give way. It’s the same with investing. Whatever investing strategy and allocation you determine is best, maintaining faith that it’s a prudent path to your most important life and financial goals will allow you to fly above the storm clouds that inevitably arise from time to time.
I’m confident every superior chess player exhibits exceptional intelligence. Not so with investing. To paraphrase Warren Buffett, temperament beats brains. That’s why I’m also confident every superior investor either exhibits exceptional temperament or chooses to lean on someone to help them filter out all the noise and focus on what truly matters.
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