Why good poker players make good investors.

[Jay]

[ QUOTE ]
Dangerous post - heres some reasons why:

15% is a rubbish return if inflation is 15% or if there are large local currency swings.
A stock doenst become a bad buy or hold because its price goes down, and vice versa. dumping your losers is a loser strategy....despite what stock brokers tell you.

Dont watch the share price, watch the news and the fundamentals. Sales/earnings is very limited as a tool. 3 years is not a long term. Think about 5 year earnings growth rate/pe ratio if you want a quick tool to start the stock selection process.

Financial planners dont usually have a clue about how to pick stocks, they normally concentrate on what funds the 'mother ship' is telling them to push....AVIOD financial planners for everything except financial planning, as well as stock brokers who utter the magic words 'you'll never go broker taking a profit'. Well, they sure as hell wont when you churn your funds every year and earn them juicy commissions.

Most fund managers are short term buyers and so never beat the average of the market.

There is emphiracal evedence that star fund managers do not perform well when they leave their employers where they made their name.

If you want to earn 15%, give your money to Berkshire Hathaway, and forget all about stock picking. They will earn the 15% or more for you over a long period. Tried and tested....to a lesser degree, try the O'higgins system, but this isnt as contrarian as it used to be.

Heres a post about why poker players NECESSARILY dont undertand investing...understand and profit from the difference.

Or just play bingo...

Bingobazza

[/ QUOTE ]

Thanks to everyone for their posts, its always interesting to get different takes on topics such as investing.

Even though the topic is why a good poker player’s traits can be a starting point for good traits for a long term investor there seems to be some areas in the article that must not have conveyed well. And some of that’s the “how to” parts.

1. Let me first say that my statement regarding “dumping losers and letting winners ride” was not intended to imply the stock price but the company itself. That should have been more clear I guess. It is unwise to dump a stock simply because a stock price may have dipped. Here would be some of my guidelines for selling a stock/company in my personal portfolio:

1. Sell because an issue of equal or better quality offers the potential for higher returns.
2. Sell because of an adverse management change.
3. Sell because of declining profits margins or a deteriorating financial structure.
4. Sell because direct or indirect competition is affecting the prosperity of the company.
5. Sell because a company has great dependence on a single product whose cycle is running out.
6. Sell companies that have become cyclical and have low-growth-rate issues because prosperity is about to succumb to recession.
7. Sell some of stock if stock price is greatly overpriced in relation to the companies growth.

My strategy is buy and hold and hold and hold.

So again dumping losers is to dump companies that usually fall into one of these guidelines (except no. 7) and not because a stock price dips. I was talking about long term investing and trying to convey that holding onto companies that may have had a successful run for 5 or 30 years may start deteriorating overall and those should be unloaded to be replaced with a better company. I would not consider the stock price the overall indication of a company on its way out and do not recommend selling based on it. There are many more areas to consider. “Let winners ride” is having companies continue their excellent growth and not to sell them. Buy and hold.

The 15% growth rate is a long term goal based on current inflation rates. If you can maintain significantly stronger growth rates over 10 plus years (at the current average inflation rate), I think a lot of people would love to know the secret.

2. Starting a stock selection requires (for me) at least 5 years of history. Sales, margins and growth are just a few areas to look at but by no means are the only areas to look at. I use many more criteria to find a stock to invest in. It’s just as silly to watch a poker player for 10 hands watch him scoop 7 pots and look at his stack size and say he’s a good player.

3. Concur that financial planners may not understand stocks and picking stocks. I’m not sure why someone would use a financial planner to pick stocks. Or for that matter use a broker to constantly buy and sell stock with large turnover. Or pay loads on a mutual fund. (I didn’t cover this topic in the original article but probably should have.)

Anyway, I probably fell into my own trap and strayed from the original subject but thought I’d try to clear up my thoughts since it appears I didn’t communicate them well. Investing is interesting to me and if the answers were so simple everyone would be rich.

Again, I wanted to say thanks for all the input and comments!

j.

[DesertCat]

[ QUOTE ]

The 15% growth rate is a long term goal based on current inflation rates. If you can maintain significantly stronger growth rates over 10 plus years (at the current average inflation rate), I think a lot of people would love to know the secret.

[/ QUOTE ]
The secret is a small portfolio. A value investor managing less than $10M has many opportunities that professionals can't take advantage of. Fifteen percent should be the low end of your expectation if you really understand value investing, have a smallish portfolio, and work at it.

But if you want to buy mutual or index funds, note that 15% is a very high expectation. Buffet has said the markets long term return is going to be around 7-8% for the next decade or so, given current pe ratios. He first said this a couple years ago, but I don't think much has changed.