Elevate Your Investing: 4 Timeless Insights From Bonsai and Poker
Surprisingly, very different disciplines have very similar pitfalls.
Surprisingly, very different disciplines have very similar pitfalls. Therefore, studying mental models from areas outside of investing can provide insights that you might not otherwise get. The link connecting Bonsai, Poker and investing? Our own behavioral biases.
I was walking in the woods this morning thinking about some of the mistakes I have made in my Bonsai practice. I started Bonsai, the art of creating potted trees that look giant in miniature, about 6 years ago. It dawned on me that these mistakes were very similar to my Poker mistakes from early days of playing the game.
Then it clicked – these are the same mistakes that I, and likely you, have made in investing as well!
Here are four mistakes that investors frequently make, inspired by similar mistakes in Bonsai, Poker or both that I have made myself:
Game Selection
In Poker, the most important decision is which game to play at which table. The 10th best player in the world is an underdog playing against players #1 through #9. Yet he would be a huge favorite in many other games.
Poker, like investing, is a game of relative skill in the long-term. If you look for easy games that you have a high probability of beating, you are likely to do very well. The problem is that your ego might lead you to try to play in tougher games. That might be fine in Poker if your goal is fun or improvement rather than profit, but in investing you should look for the most profitable areas.
What does that mean in practice for investors?
Some areas of investing are structurally less efficient. Two examples are special situations like spin-offs and smaller, less-followed companies. On the other end of the spectrum are the well-followed blue-chip large cap stocks. This doesn’t automatically make the former good investments and the latter bad ones. It’s just that your odds of finding excess returns are going to be much higher in the less efficient pockets of the market.
Don’t let your ego drive your decision of where to look for opportunities. Let others try to beat the world’s best if you think you can make much easier money elsewhere.
Starting Requirements
In Poker, the starting hands you choose to play are very important. Large online databases of expert players have shown that some hands are consistently profitable, others are marginal or only profitable in some circumstances, whereas others are consistently unprofitable. Unfortunately, the fact that in theory skill and circumstances could make any hand profitable has led many a player, including myself, astray. Being overconfident about their level of skill, they try to push the action at the table out of arrogance rather than be disciplined and stick with clear winners.
In Bonsai, certain species are much more conducive to being used than others. This is because the goal is to create the illusion of a giant tree proportionally shrunk to a miniature size. This means that certain specie characteristics such as large leaves that don’t reduce or long inter-nodes are very undesirable and aren’t going to get better with time. Given that you are going to spend years working on a tree until it looks half-way decent, starting with the wrong species is a trap that is best to avoid. Yet that’s exactly what I did for the first few years out of sheer excitement that I found a piece of nursery stock that seemed decent in other ways. The results are in, and they aren’t pretty. These days I am only working with species that I know to be a good fit – you can’t change genetics with technique.
Similarly, in investing you can’t change the “species” or the odds of success of the “starting hand value” of the investment. For years I was attracted to marginal businesses that had some redeeming characteristic – maybe the stock was cheap, or the balance sheet was strong. These rarely worked out well. It also took me too long to realize that it’s hard to have a good investment outcome when management is either incompetent or when their incentive is to make money at your expense rather than with you.
Stick with good businesses managed by honest and competent people. Yes, that will reduce your universe of potential investments quite a bit. However, there will still be plenty left to choose from. I recently went through all companies in the markets where I invest in, one by one, and out of around 10,000 candidates only about 1,000 passed my initial criteria and now constitute my “hunting ground” for ideas. Interestingly, this 10% ratio is very similar to the percentage of starting poker hands that consistently show a profit over time.
What about the other 9,000? Isn’t there a price at which anything can be a bargain? In theory there is, but the risk for me of going astray and trusting that “this time is different” is too great. Painful experience has taught me to “play tight” in poker terms and opt to pass on situations where I don’t think most things line up.
Time Horizon
In Poker, skill wins, but only in the long-term. In the short-term it’s mostly luck. In Bonsai, it takes years to create a tree that begins to look like what the artist intended.
Yet, we are all too eager to push the action and try to get to the finish line faster. In Poker, players try to force marginal situations rather than wait for clear winners. In Bonsai, practitioners sometimes try to do too much too soon to the tree, resulting in damage or death.
Don’t try to rush the outcome. Focus on the process, stay within your own circle of competence, and your long-term results will be there. Clearly many “investors” disagree with this wisdom – witness the rise in one-day option trading in recent years. I suspect these folks will learn the hard way, but you shouldn’t.
Boredom
Boredom is the secret villain that’s robbing you of returns. It’s also what’s causing both Poker players and Bonsai practitioners to do things that they shouldn’t.
In Poker, doing nothing 90% of the time is boring. However, the answer isn’t to play more hands. Instead, you should be learning information about the game and your opponents while you aren’t playing.
In Bonsai, there is the temptation to do work sooner than the tree is ready for. Or to buy marginal starting material just to have something to work on. Neither is going to elevate your Bonsai practice. Instead, it’s better to focus only on trees that meet your tough criteria, and to do work at the right pace. The rest of the time can be spent learning or even spending time outdoors observing nature rather than locking yourself in to at best guaranteed mediocrity and at worst catastrophic failure.
In investing, boring is good. Some of the best companies have compounded profits for decades but were never very exciting in any quarter or year. What was exciting was the long-term returns. While passing on idea after idea might seem boring, instead of acting when it’s not warranted you can study great businesses or improve your technique while waiting patiently for the right combination of business, management, and price to come along.
What all of these have in common is that these are our natural tendencies as humans. And in some disciplines, our natural tendencies don’t lead to the best results, including in investing. That is why temperament is so important – you need to be able to act uncommonly infrequently and calmly under stress. That’s no easy feat.
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About the author
Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.