rsq
05-31-2005, 05:41 PM
It is amazing the similarities between making good stock investments and good poker plays. Just two simple examples:
1. Start with a good hand. How many times does a 5d6s win? Not very - so it is with stocks. How many times do you hear of people buying stocks with insane P/E ratios becuase of a great story on the come. When they hit they can hit big - but more often they fail and making that a staple of your investment process is idiotic.
2. Have a strategy for your move. Are you raising to drive someone out, calling to slow play - whatever it is you should dictate the action on the table and it should fit the circumstances. You have to pick companies that have a reasonable strategy for thier circumstance. It is amazing how many companies pursue a strategy destined to destroy value. Whenever you invest your money, you should expect a return greater than what the money costs you. For exmaple if you will buy a rental property and borrow at 8%, your investment needs to make more than 8% to creare value. Companies need to follow a similar course, or they will bankrupt thier owners. Yet each year, over 25% of US companies fail to earn thier "cost of capital", the amount they must pay to access the assets at thier disposal. Not surprisingly, these firms significantly tend to underpeform the overall market and ultimately act as torpedo stocks on a portfolio.
3. Need to see through bluffs. In poker, it is critical to understand when an opponent is bluffing, to avoid giving up hard fought gains. It is no different with stocks. The typical stock will move 30% up and down around the price it started the year. Therefore if you do not know the underlying reasons for purchasing a company and it hits a normal down draft you may very well sell what will be a huge winner in 4 months as the company naturally trends up. Though if you did your homework properly before buying a company, similar to betting with many outs, the company is likely to report good news and outperform the overall market.
Other thoughts...
1. Start with a good hand. How many times does a 5d6s win? Not very - so it is with stocks. How many times do you hear of people buying stocks with insane P/E ratios becuase of a great story on the come. When they hit they can hit big - but more often they fail and making that a staple of your investment process is idiotic.
2. Have a strategy for your move. Are you raising to drive someone out, calling to slow play - whatever it is you should dictate the action on the table and it should fit the circumstances. You have to pick companies that have a reasonable strategy for thier circumstance. It is amazing how many companies pursue a strategy destined to destroy value. Whenever you invest your money, you should expect a return greater than what the money costs you. For exmaple if you will buy a rental property and borrow at 8%, your investment needs to make more than 8% to creare value. Companies need to follow a similar course, or they will bankrupt thier owners. Yet each year, over 25% of US companies fail to earn thier "cost of capital", the amount they must pay to access the assets at thier disposal. Not surprisingly, these firms significantly tend to underpeform the overall market and ultimately act as torpedo stocks on a portfolio.
3. Need to see through bluffs. In poker, it is critical to understand when an opponent is bluffing, to avoid giving up hard fought gains. It is no different with stocks. The typical stock will move 30% up and down around the price it started the year. Therefore if you do not know the underlying reasons for purchasing a company and it hits a normal down draft you may very well sell what will be a huge winner in 4 months as the company naturally trends up. Though if you did your homework properly before buying a company, similar to betting with many outs, the company is likely to report good news and outperform the overall market.
Other thoughts...