The Olympics of investing

Published in The Sunday Times on 25th August 2024.

Sport and investing have a lot in common. As the dust settles on a brilliant fortnight of Olympic action in Paris, the temptation to draw analogies with investing is strong. Much binds the two worlds – long term strategy, a focus on goals, planning, discipline etc. But in truth, there is more that separates them. 

A lesser reported event that took place in July in Vegas, the world series of poker (the Olympics of the profession), arguably has more to teach us about investing.

Olympic athletes train for a lifetime and then have success defined in a moment.

Fortunately, that’s not the case with investing. No one month, quarter or year-end is more significant than another, and none determine success or failure. The mantra that you need to ‘take a long-term view’ is true, but success is not judged at a point in time.  

I was struck by something that was said by one of the Irish 400m athletes, Sharlene Mawdsley, after she brilliantly helped the relay team qualify for the final. She was on the final leg of the relay and was in a decent position by the time she got the baton from Phil Healy. In the interview, she said she couldn’t sit back and wait for things to happen . She needed to go on the attack and go out strong. 

This couldn’t be more at odds with investing. You don’t have to make changes in reaction to what is happening around you. Just because the stock market is bouncing around and you’re being bombarded with information, there’s no pressure to act. For an investor, most often, the best action is no action.

And there are no extra returns for difficulty in investing. Warren Buffett likes to point out that investing isn’t like Olympic diving. “You get paid just as well for the simplest dive, as long as you execute it all right.” And to round out the Olympic analogies, Buffett has often remarked that Berkshire doesn’t try to jump over a bar that’s 7-feet high,. “We look for one-foot bars we can step over”. 

Investing has a lot of the same features as poker. It is a game of incomplete information where important information remains hidden. You must make decisions under conditions of uncertainty and there is an element of luck in any outcome. 

As former world poker champion Annie Duke outlines in her book ‘Thinking in Bets’, “You could teach someone the rules of poker in five minutes, put them at a table with a world champion player, deal a hand (or several), and the novice could beat the champion.” Most things in life, –  including investing,  – are like poker. Luck can allow a hopeless poker player to go on a winning streak, just as a clueless investor can strike it rich by getting lucky on a speculative stock.

An essential skill in investing and poker is looking only at long-term performance and ignoring short-term results. A poker player should not be delighted nor disappointed with the results of one hand, or a few sessions. In the short run, the role of luck is magnified, while over time, skill matters more. 

The same is the case with investing; an investor cannot be said to be successful or unsuccessful based on a few good or bad years. It is the consistent long-term performance that will matter.

We link results with decisions - deciding whether a decision is good or not based on its outcome. It’s what poker players call “resulting”. Where there is uncertainty, a decision cannot be judged to be good or bad based on its outcome. Sometimes, even bad decisions can have good outcomes due to factors outside of our control. No sober person would conclude that drink driving is safe after driving home without incident after six pints. The quality of a decision is not solely based on the outcome, but also on the decision-making process itself.  

Like poker, there are not likely to be that many investment situations where the odds of a positive outcome are firmly on our side. A pair of aces is the best starting hand in Texas Hold’em. But as Howard Marks observes, if you’re going to wait for aces to play a hand, you’re going to end up throwing away a lot of hands that have a good chance of winning, but aren’t dead certs. Like poker players, investors should learn to embrace uncertainty and think in terms of probabilities. The best you can hope for is to have odds that are stacked in your favour. Those odds aren’t as clear as poker odds. Real life doesn’t present such an obvious problem. It is the acceptance of the lack of certainty in our knowledge is the key hurdle for many in getting started with investing.

Very few people end up as Olympians. It requires extreme talent, discipline, and huge sacrifice. But success at investing is open to all. You don’t need rare talent, nor do you have to make huge sacrifices. But you do need discipline. 

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on twitter @gconno1.