“Success is nothing more than a few simple disciplines, practiced every day.” – Jim Rohn
Investing and life are more like poker than chess. I recently listened to an interview with Annie Duke. Ms. Duke’s book, Thinking in Bets along with the interview really resonate with me because her thinking is quite similar to mine.
In this quick video, I detail the parallels of investing and poker and why it is critical to keep a “poker face,” keeping your emotional composure during bad….and even good investment periods!
About Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts
Annie Duke, a former World Series of Poker champion turned business consultant, draws on examples from business, sports, politics, and (of course) poker to share tools anyone can use to embrace uncertainty and make better decisions.
I like this book for many reasons, the greatest one being the statement, “Even the best decision doesn’t yield the best outcome every time.” In poker, like in investing, you can make the best decisions but there are still unknown elements at play.
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full service financial firm headquartered right here in Boulder, Colorado.
Today I want to talk about how investing and life is more like poker than it is chess. I got a lot of these ideas I’m going to share with you today from an interview and a book that I read by Annie Duke. I’m going to put a link in the newsletter and in the transcript of this. (http://a.co/aw2KM5f) Annie Duke, Thinking in Bets.
And when I heard her interview on this podcast it was like she was speaking right to me because that’s the way I think. And so of course I thought she was brilliant. If you watch my videos going back seven, eight, nine years you’ll hear that I talk in well let’s increase our probability of success. And I think the odds are because that’s really the way life and investing is. Let’s think about chess for a second. Chess there’s these pieces on the board and all of them are visible. You see it and so does your opponent. With all that visibility it’s a completely logical game. The person who is the more experienced, the person who is the better player should always win. And if that person doesn’t win then they can go back piece by piece or play by play and say oh, this is where I made a mistake.
That’s not the case with poker. Let’s talk about poker for a bit. You don’t get to see all the cards so there’s a hidden element there. It’s all a bunch of odds. You might have an 85 percent probability, 90 percent. But there’s still 10 percent that you could be wrong. And it doesn’t mean that you were wrong because the outcome went against you. But there were things that you didn’t know. There were unforeseen things and there is luck. I’m not going to ask you to raise your hand but if I was to say who has run a red light, most of us would raise our hand. Even if it’s only once in our life or if it’s once a day. Just because you run a red light doesn’t mean you automatically get hit although it dramatically increases your odds of getting hit. Just like if you’re following the rules and you go through a green light it doesn’t guarantee that you won’t get hit, T-boned by somebody else. So there are factors outside of our control that we have to understand.
When we’re looking at a poker game, a typical poker hand a professional might take two minutes. Therefore, you might have 30 hands in an hour. And a professional poker player is going to know the odds. They have to work really hard to know the odds, play the game, to be cool. Maybe there’s a string of bad luck that you have but you stick to your particular core knowing that you’re a really good player. You know the odds better than the people that you’re playing against and you just can’t get too emotional one way or the other. If you’ve ever seen a poker game nobody’s jumping up and down when they win or at two, three or four hands they’re getting super depressed. Maybe amateurs are but definitely not the professionals.
So investing is very similar. We can do the best that we can with all the different variables that are known to us we can come up with a strategy. We can say wow, I think the market is going to do this, I think the market is going to do that. And we could be wrong because there are going to be things that are unforeseen that are going to be in the future. Nobody knows the future. So that by definition is going to be a variable that we’re not able to account for fully. Therefore, what do we do? What we do is we, of course, look at a diversified portfolio. We say well how can I not stick my neck out so much that if that 10 percent or that 20 percent or whatever the number is that I’m wrong, I’m really stuck that I’ve lost so much. How much are you willing to risk? So a diversified portfolio is very, very important. Staying in it for the long term. If you find your strategy that works with your risk level, your tolerance, that allows you to stay emotionally cool it’s got to be a long term. If you were a poker player it might be many hours. If you are an investor it should be many years. And so you’ve got to keep that in mind as well.
Life is full of unknown variables so we try to increase our knowledge. We try to increase it so we can make the best decisions. We try to learn from those decisions as well. It is not a chess game. It’s not a guarantee. So if you’re looking for a guarantee then investing in life, you know, you’ve come to the wrong place so you’re never going to get that and you’re going to be continually disappointed.
Mike Brady, Generosity Wealth Management, 303-747-6455. You have a great day. Thanks. Bye bye.
“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do, so throw off the bowlines, sail away from safe harbor, catch the trade winds in your sails. Explore, dream, discover.” – Mark Twain
The 1st quarter of 2018 is already over and it was an interesting 3 months to say the least. If we look at 2017, the fact that we had only a little bit of volatility is the exception. Most years there’s over ten percent declines at some point during the year. Which is something we’ve about hit already this year. That’s the normal and not anything to be freaked out about – listen to find out why.
Transcript of the video:
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full service financial firm headquartered right here in Boulder, Colorado.
I’m here to talk about the first quarter review and the rest of the year preview. Charles Dickens in a Tale of Two Cities started off by saying it was the best of times and it was the worst of times. I suppose maybe we could start off that way with the first quarter as well. January for the unmanaged stock market indexes was a continuation of a strong upward movement that we saw in 2017 with very little volatility. That’s really one of the big stories as far as I’m concerned is that 2017 was so low volatile and that was the unique situation. All the way up to about January 26 of this year when volatility decided to come back. And so we definitely saw that in February. March looked like it was starting to come back up again and then we gave it away in the third week of March. And so the quarter ended a nine out of the eleven major S&P sectors, 9 of them were negative and two of them were positive. And those two that were positive was actually information technology and consumer discretionary. And so that’s kind of interesting.
Of the indexes, pretty much all of them were negative except for emerging markets and actually the NASDAQ. The NASDAQ unmanaged stock market index was positive. But even those that were negative in the U.S. here, not counting – I mean when you look at Japan and you look at some of the others abroad they were actually down quite a lot at negative seven percent or so. We were down one-and-a-half to two-and-a-half percent. That’s really breakeven in my mind, particularly when you can make a one percent move in a day which we definitely had some more one percent moves this past quarter than we had in quite some time in the last couple of years.
So it’s good to put this in perspective. The way I look at investments is that it’s three steps forward, one step back and maybe sometimes it’s two steps back. And if you focus so much on the negatives, on the steps back, then you’re never going to have the steps forward as well. And so when all this volatility is happening and let’s look at that chart that I have up on the screen. So you’re back to where you were three-and-a-half months ago. This is not that you’re back to where you were ten years ago.
Let’s put everything in perspective. As a matter of fact, it is normal for there to be volatility. It is normal for there to be declines. And with the number, the DOW being 25,000 and 26,000, 500 and 1,000 point movements are less significant as a percentage. So we have to look at things in percentages. I remember back in 1987, you know, I’m 49 years old right now and at that time I was a freshman in college when the October 1987 crash happened and that was 500 points. Well that was 20 to 25 percent of the whole market. Well, 500 points on 25,000 is not that statistically significant like it was 20 to 30 years ago. So the numbers get magnified just like our portfolios. The larger the numbers, of course, a percentage change one way or the other can be thousands, tens of thousands, maybe hundreds of thousands of dollars. And so we have to keep it in perspective from a percentage point of view.
I continue to be optimistic and that means not that I guarantee it, absolutely not. There’s no guarantees in this world. Life is not a guarantee. Investments are not a guarantee. I’m actually going to do a follow up video to this about how investing is like poker, not chess.
Just to give you a little preview of that. There are unforeseen things in poker and there is a certain amount of luck involved in poker whereas chess is all strategy. The better person should always win whereas that’s not the case in poker and that’s not the case in investments and that’s not the case in life. There are things that are unforeseen, things that we can do the best that we can. We can increase our probabilities of success. And so as I look towards the rest of the year I see lots of profitability with companies, I see lots of technical change continued. I believe that the tax change that just happened was a very favorable thing, at least in the short run and the short run being the next one to three to four years or so as cash comes back I’m sure, and we reinvest some of that cash as well. Other people might have a different point of view and that’s absolutely fine. That’s what’s great about America is that we can have different points of view.
You have to remember though that from a long term point of view which is the way we have to look at it, things are complicated. There’s many different variables that determine this. And so you might place a higher value on the variability of chaos as you might see it. You might place a higher value on tariffs and say wow, this is a bad thing. I don’t place that as high of a concern but maybe I’m wrong. Maybe you’re right, maybe you’re wrong. Maybe you get it. I just read this morning how Elizabeth Warren is in favor of the tariffs in China just like President Trump. I never thought the two of them would agree but there we go.
So it’s very interesting that there’s all these different variables. We have to remain long term investors because I can go back 25 years, I’ve been doing this 27 years, and go back my entire career and there’s always been a reason to be pessimistic. There’s always reasons to be optimistic and so the question is over a longer term – three years, five years, ten years, et cetera, what’s in your best favor because it’s very hard to read the tea leaves on a shorter term basis.
I’m optimistic. I continue to be so. I believe that there’s a greater than 50 percent probability that things are going to continue to work out fine. Maybe there’s going to be some increased volatility which is normal. The fact that we had only a little bit of volatility last year is the exception. Most years there’s over ten percent declines at some point during the year. And so we about hit that this year. So that’s the normal and not anything to be freaked out about.
Mike Brady, Generosity Wealth Management, 303-747-6455. Give me a call at any time. Thanks. Bye bye.
As volatility has increased in the past 3 weeks, I want to keep you well informed of my thoughts.
Are the past weeks normal, have the fundamentals changed, or is this the canary in the coal mine we’ve been waiting for?
These questions are answered in my video.
Hi, Mike Brady here with Generosity Wealth Management, a comprehensive, full service wealth management firm, headquartered right here in Boulder, Colorado.
I last spoke to you a couple of weeks ago and at that time, I talked about the third quarter. I said it’s been a tough quarter, very volatile and it was down. We’ve taken some steps back as it relates to the unmanaged stock market indexes. So far this quarter in the last couple of weeks, that has continued on the downside. Nobody ever minds volatility on the upside. One thing that’s interesting is over the last 25 years the daily average of volatility has been 0.77%, about eight-tenths of 1% on a daily basis. So far this year for the first half of this year, it was a half of 1%. It was kind of the average volatility on a daily basis. One of the reasons why the last two to three weeks seems so alarming is because the volatility has been over 1% so it’s two to three times what we’ve been kind of lulled into feeling the first half of this year and also what is normal when we look back over a 25-year timeframe. Two weeks ago, I mentioned that the smart money looks at the data and what’s happening now and says okay, so how far out an outlier is this? Is this something that actually happens quite often or periodically and that it’s a part of the game investing, part of what we should expect or is this is a precursor to something much more deadly? Are the fundamentals telling us that this is an early canary in the coal mine of some bad that’s going to happen? My answer is the first, not the latter, in that this is actually normal even if it is painful, a part of the process. When we look at a longer time horizon which is what sort of the smart money should do is looking at it from where does this fit in one year, five year, 10 year and even longer than that.
I’m going to throw up on the graph there up on your screen there, looking back over a 17-year time horizon for the S&P 500 which is an unmanaged stock market index and this is as of September 30. I’m going to put a little red mark where we are right now just to give it some perspective. I’m doing this Tuesday night so I know exactly what our closing number was and hopefully you’re getting this on Wednesday or Thursday. You can kind of see that in the whole scheme of things we could have said at that other line that I just put in there, yeah, you can see it’s a pop. It’s not going to go any higher and then we could have done it all the way from that bottom arrow all the way to where we are today. We could have said, oh my gosh, this is a high, it can never go any higher.
I’m going to put on the screen now a second graph which is looking back 114 years. You can see that there are consolidation periods and then there are times of advance, consolidation periods of times of advance. You can see there and I’ve just circled it where I believe that we are. I actually believe that we are on a longer-term advanced than we are in consolidation or a decline. Other people can make an argument to the downside; that’s okay. We always joke that economists have predicted 17 of the last the last three recessions so that’s an easy thing to do. The hard thing is for me to try to be as straightforward with you and say this is a part of that long-term process. As a matter of fact, our emotions have a tendency want to react in the wrong way. I’m going to throw a chart up on the screen there. You can see that in the late 90s, consumer confidence was at an absolute high, but that was the worst time to buy. Okay? Now you’re going to see back in the beginning of ’09 which was the beginning of that huge upswing that I showed you in the first graph that consumer confidence was a low. Then two years ago right before last year’s really strong stock market gain, consumer confidence was once again at a low. It’s almost contrary of what you would think. Like oh, people are feeling all negative so the market must go down negative. No, it’s quite the opposite. In fact, kind of what we call a lagging indicator where people actually do the wrong thing at the wrong time.
The next graph that I want to show you is up on that screen there. I think this absolutely essential. What you are going to see is those red numbers at the bottom are the intra-year decline. What that means is if the market was up 10% and then it drops 7% and at the end of the year at 3% or maybe it even ended at a different number, the high to the low throughout that year is normally a seven, eight, nine, 10, sometimes double digits so it is normal for there to be corrections within the year. It does not mean the year will end that way. I think that’s absolutely essential for us to keep in mind because we do take five steps forward at times and four steps back. If we believe that in the future that the market will be higher than where it is today, that’s why we have investments. If we didn’t believe that, why would we have investments? Keep it in your mattress, keep it in the bank. That makes no sense if you believe that long term the market is going to be lower than it is today over long term. I think that’s not a very wise bet.
I’m going to throw another chart on the screen; it’s a table. The reason why I throw this up there is because there is a well, you know, it’s just like the 1990s or it’s ‘07. Let me just tell you, look at the price to earnings ratio of about 15%. It was double that back in the late ‘90s. I mean from a valuation point of view, we’re nowhere near where we were in previous times when we’ve had a huge decline. We have lots of cash, a huge profitability, leveraging is down so this is a very good thing and the fundamentals I feel are still strong.
This last graph I want to show you I think is very, very important and that it shows historical returns by holding period. What you’re going to see is that on a yearly basis, that’s the one on the far left-hand side, there is a huge variance. The left one is 100% stock, unmanaged stock market index. The next one is 100% bond index and then there is a mix of the two together. With the one year, there is a huge variance. That’s just the way things work. Once we look out five years, 10 years, even 20 years that variance, that kind of expected return or that highs and lows have a tendency to kind of, the highs go lower and the lows go higher. For a 50/50 split historically, of course it could be different in the future, there actually has never been a five-year timeframe when the worst you’ve done is make 1% a year. Moving out to cash, thinking that you’re going to try to outsmart everyone else, that you are reading the headlines and you have some supposition of about what’s going to happen in the future I think is not very wise.
The very last thing I want to show before I cut this video is the benefits of having a stock and a bond mixed together. You’ve seen me do this before even with my hand. Up on the screen there is the 10-year Treasury note yield. It’s declined which is a good thing. The yield goes down when the price goes up. You can see that there is actually huge volatility in the last year. Those arrows there are in the last kind of year-to-date. This has been a great year to have bonds. In hindsight, having 100% of your portfolio in bonds would’ve been a fine thing to do. We don’t know hindsight so that’s why we have a mix of stocks and bonds and of course that mixture depends on the client what’s appropriate. Of course, having a well-diversified portfolio does not guarantee against declines in a general declining market, but I do believe that it is the wise way to go going forward. You can see that in the last month or so as the stock market has rarely gone down that the bonds have actually gone up. Once again, we know that because the graph went down which is counter-intuitive, but it actually meant that bonds went up so this is a good thing for bonds when the graph looks on the downside from left to right like that.
That’s what I have for right now today. I’m going to continue with these updates to you, my clients and to my friends and prospects, prospective clients. I’m here if there are any concerns that you have, 303-747-6455. Investments are a part of the big picture of getting you to where you want to go with your goals, etc., but I’m not overly freaked out about where things are at this point. Hey, would I wish that things were higher? Of course, of course, but do I over react and scrap my plan based on some weeks and months of data? Absolutely not and you shouldn’t either.
Mike Brady, Generosity Wealth Management, 303-747-6455. You have a great day, see you, bye-bye.
In my video today, I ask the question “is it time to run for the hills, or jump off the ledge?” because of the recent increased volatility and decline in the markets.
Let me give you the short answer: no.
The bond correction was an over reaction, and the most recent equity dip is not a precursor to some big decline. At least not in my opinion.
For a full discussion of this, listen to my short video where I expand on these ideas.
Hi there, it’s Mike! Friends, Mike Brady here with Generosity Wealth Management – a comprehensive full service wealth management firm right here in Boulder, Colorado and today’s conversation is about whether we ought to run for the hills, find that ledge, and jump off it, because if you’ve been watching or reading in the news recently the volatility has gone up in the unmanaged stock market indexes and some of the bond markets as well.
They’ve decreased and the answer is no, I don’t believe that we should jump off that ledge and I think this is a short term correction to what we’ve seen. Let’s talk about the unmanaged stock market indexes first and foremost; your S&Ps, your DOWs, your NASDAQ, etc. I’m going to put a chart up there on the screen and if you have been watching my videos for a long time, you’re very familiar with this chart.
It is normal for there to be intra-year decline throughout the year, going back years and years and years. Every year there is one and every time there is one, we always freak out and forget that that’s a normal thing. I think this is going to be one more of those normal things, not the beginning of some huge decline where we lose 20%, 30%, or 40%. I just don’t see that with all of my analysis.
I also think that it’s going to be relatively short lived as well. Let’s talk about the bond market. The yields have spiked up in relation to the bond prices going down. Back in June, Ben Bernanke was the chairman of the Federal Reserve. He made some comments about starting to taper off. Now of course, he’s taken all summer to kind of back off some of those comments, but essentially let’s think about money in the economy as money in a bowl.
Here, kind of look at my hands there. Money in a bowl. You could put money into it; you can take money out of it. For the last four or five years, we have definitely been putting money in there by decreasing the interest rates, but also doing a bond repurchase. What he said back in June was not that we were going to start taking money out of it, but if we’re stop one of these two levers of putting money in – the bond repurpose.
You just said we’re going to put in – we’re going to buy left backs or we’re going to put less money in. Also, there’s an accumulated amount of sums and money in there already. I think that the concern isn’t overreaction and it took us a long time to fill this bucket with a lot of money. It’s going to take a long time for that impact to really be felt. At this point, there’s money in there for banks to lend out and they are definitely doing that at this point.
I think that the reaction even on the bond market, is an overreaction and I’m not freaked out about that as well. It is important to have a portfolio that has both stock and bond components in general, being very general, each client is different of course. The percentage that you have in those two of course is specific to what you’re trying to do with your particular strategy, whether that’s your retirement strategy or growth strategy and income strategy, etc.
The mix between these two, some things zig when the others zag. At this point, the equity markets in general have that. All of the bond markets in general have been down so they’re going to compete in force this year. In previous years, it’s been reversed where the bonds have done well and maybe sometimes the stocks at various points have gone down, so having that mix makes a lot of sense.
I’m going to end this video with something that I really like from Warren Buffet. Back in 1975, he wrote a letter to Katharine Graham who owned the Washington Post and he basically told her to keep the long view, the long picture in mind. Think of it as he wrote in the letter of a thousand coin tosses and there are going to be times when five or 10 of those are going to be in a row all head or all tails.
You might see it all-sided one way or the other, but it really is just a short time frame that does go back down to normalization. It’s the same way when we’re looking at investments. We’re here for the long term. We shouldn’t get too excited if there’s a month or a quarter or even a year that’s off. They do have a tendency to go up and down in value.
The reason why we have investments, of course, is that we assume that the future value will be greater than today. Whether that future value is five years, 10 years, 20 years – whatever it might be. Otherwise, why would we have investments? Why would you put it in there? You’d put in your master of storing in the bank savings account.
It’s important to take that into consideration that there are times both five to 10 coin tosses as Warren Buffet says, but we’re really kind of looking at it as we’re building this portfolio up together that works for us with our particular risk tolerance level and what you’re really trying to achieve. You’ve heard me, ad nauseum, talk about how important the strategy and the retirement analysis and the plan is and that we then use managers and other investment vehicles in order to support that particular strategy.
Let’s keep our eye on that particular strategy.
Mike Brady, Generosity Wealth Management. There was an awful lot here in a short amount of time, but I like to make my videos short, and pithy, and to the point. Hopefully today I achieved that.
Americans’ grasp of concepts such as investment risk and inflation has weakened, lower than 2009, according to research reports.
On the flip side, confidence is still high, and many people gave themselves high marks for managing their finances even as they were using payday loans or over-dawing their checking accounts.
As my video above discusses, understanding some of the “big issues” can determine the success or failure in reaching your goals.
You obviously have higher than average financial knowledge (because you’re reading my newsletter), but still let me know if I can help you or someone you know, in tackling all financial decisions.
