You Bet! 5 Tips on Uncertainty by Howard Marks
Howard Marks publishes his memos regularly and they contain useful insights into day to day life to investment decision making. They are a must read in the value investor community. His memos warned about dangers of the dot com bubble and the housing bubble before they were happening. So even legendary investor Warren Buffett admitted he immediately reads Howards memo when it is out.
Howards latest memo is about uncertainty: You Bet!
Annie Dukes Book: Thinking in Bets (I already ordered it)
#1 Learn by playing
Howard laid the foundation of his investment career when he was a child and early adulthood. He enjoyed playing games like "War" and "Old Maid" and later Bridge, Poker and Blackjack. Now he plays Backgammon and Gin.
#2 Think in Bets
A bet is a decision about an uncertain future. A winning or losing outcome is the sum of the quality of a decision and luck. Thus a wise decision does not grantee a successful outcome and a losing outcome does not invalidate a wise decision. Vice versa a stupid decision can lead to a very successful outcome. A good process of decision making contains the state of the knowledge at the time and many "I am not sure about ..." (Make peace with not knowing)
#3 Types of Gambles
No hidden information in a games is if all players share the same information. Visible chess board versus hidden poker hand.
Luck is created by a non-deterministic process. You cannot predict the roll of a dice.
A game has some level of skill required, if you cannot lose the game on purpose. Peter Thiel notes, that all failed startups fail because of similar reasons; yet all successful ones succeed, because of different reasons. In a game of skill its easy to determine a loosening strategy, yet its very difficult to determine a winning strategy.
* All investors have equal access to information, yet investors looked at different parts of that information, thus aggregated information in each investor is different. Quality of information matters more than quantity.
** An index investor knows only the composition of the index. No hidden information, no luck and no skill.
Alpha markets: The less efficient a market is the more skill will be relevant -> Active Investing
Beta markets: Why pay someone for skill when skill does not matter -> Passive Investing
#4 The Essence
Gauging the likely outcome. Many people think figuring out who’s most likely to win is all you have to do to successfully bet on card games, backgammon or sports. They’re missing a huge part of the matter, and perhaps the far more important part.
Assessing the proposition. Everyone might like to bet on a favorite, but that means it’s unlikely they’ll be able to find someone to take the other side of the wager: to bet against the favorite without an inducement.
Sometimes it’s a good idea to bet on an inferior position . . . even though doing so is expected to result in a loss most of the time. It all depends on the proposition. A winning proposition is for example a payout of 4 to 1 when the winning average is 1 in 3.Over time your average gain will be $1.33 for every $1 bet even if you loose 66% of the games.
The goal is to find situations where the odds are generous to one side or the other, whether favorite or underdog. In other words, a mispricing. The best investors have a sense – perhaps innate and instinctive – for situations where the proposition is too favorable relative to the underlying fundamentals.
Success in investing doesn’t come from buying good things, but from buying things well, and it’s essential to know the difference.
It’s not a matter of what you buy, but what you pay for it.
#5 Guest
Which games to pick: In highly competitive markets its better to look for less competitive niches or markets. So that your competitors become weaker.
Tendencies markets to get more efficient: Less competitive markets attract stronger competition thus pushing the competitiveness up.
Circle of competence: Play inside your knowledge and do not stray outside so that the unknown (un-) knows do not kill you.
Do not play every hand: Sometimes its better to sit on the side line and wait for better propositions.
Maximize wins and minimize losses: Bet big if you have a big edge and bet small when you have a small edge - and know the difference!
Survive downturns: Avoid risks of ruin and stay in the game. Keep enough so that you can recover from (big edge) losers.
Adjust your play to the environment: If there is less competition you can play more hands; if there is more competition you might have to tighten up.
Overcome emotions and biases: Do not chase money and hope for a lucky outcome. Bet too much on a weak investments or doubling down on losers.
Second-level thinking: How competitive is the market and its participants? Fear of missing out or blood on the streets? What are the other market participants thinking and expecting? What do they know I do not know? What do I know what they do not know? Do I have an informational edge?
Bonus: Annie Duke Quotes
"If we aren’t wrong just because things didn’t work out, then we aren’t right just because things turned out well."
"A great poker player ... will still be losing over 40% of the time. ... That’s a whole lot of wrong. And it’s not just confined to poker."
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| Howard Marks: You Bet! |
Howards latest memo is about uncertainty: You Bet!
Annie Dukes Book: Thinking in Bets (I already ordered it)
#1 Learn by playing
Howard laid the foundation of his investment career when he was a child and early adulthood. He enjoyed playing games like "War" and "Old Maid" and later Bridge, Poker and Blackjack. Now he plays Backgammon and Gin.
#2 Think in Bets
A bet is a decision about an uncertain future. A winning or losing outcome is the sum of the quality of a decision and luck. Thus a wise decision does not grantee a successful outcome and a losing outcome does not invalidate a wise decision. Vice versa a stupid decision can lead to a very successful outcome. A good process of decision making contains the state of the knowledge at the time and many "I am not sure about ..." (Make peace with not knowing)
#3 Types of Gambles
No hidden information in a games is if all players share the same information. Visible chess board versus hidden poker hand.
Luck is created by a non-deterministic process. You cannot predict the roll of a dice.
A game has some level of skill required, if you cannot lose the game on purpose. Peter Thiel notes, that all failed startups fail because of similar reasons; yet all successful ones succeed, because of different reasons. In a game of skill its easy to determine a loosening strategy, yet its very difficult to determine a winning strategy.
| Game | | Hidden Information | | Luck | | Skill |
|---|---|---|---|
| Chess | X | ||
| Backgammon | X | X | |
| Roulette | X | ||
| Poker | X | X | X |
| Active Investing | X* | X | X |
| Passive Investing** |
* All investors have equal access to information, yet investors looked at different parts of that information, thus aggregated information in each investor is different. Quality of information matters more than quantity.
** An index investor knows only the composition of the index. No hidden information, no luck and no skill.
Alpha markets: The less efficient a market is the more skill will be relevant -> Active Investing
Beta markets: Why pay someone for skill when skill does not matter -> Passive Investing
#4 The Essence
Gauging the likely outcome. Many people think figuring out who’s most likely to win is all you have to do to successfully bet on card games, backgammon or sports. They’re missing a huge part of the matter, and perhaps the far more important part.
Assessing the proposition. Everyone might like to bet on a favorite, but that means it’s unlikely they’ll be able to find someone to take the other side of the wager: to bet against the favorite without an inducement.
Sometimes it’s a good idea to bet on an inferior position . . . even though doing so is expected to result in a loss most of the time. It all depends on the proposition. A winning proposition is for example a payout of 4 to 1 when the winning average is 1 in 3.Over time your average gain will be $1.33 for every $1 bet even if you loose 66% of the games.
The goal is to find situations where the odds are generous to one side or the other, whether favorite or underdog. In other words, a mispricing. The best investors have a sense – perhaps innate and instinctive – for situations where the proposition is too favorable relative to the underlying fundamentals.
Success in investing doesn’t come from buying good things, but from buying things well, and it’s essential to know the difference.
It’s not a matter of what you buy, but what you pay for it.
#5 Guest
Which games to pick: In highly competitive markets its better to look for less competitive niches or markets. So that your competitors become weaker.
Tendencies markets to get more efficient: Less competitive markets attract stronger competition thus pushing the competitiveness up.
Circle of competence: Play inside your knowledge and do not stray outside so that the unknown (un-) knows do not kill you.
Do not play every hand: Sometimes its better to sit on the side line and wait for better propositions.
Maximize wins and minimize losses: Bet big if you have a big edge and bet small when you have a small edge - and know the difference!
Survive downturns: Avoid risks of ruin and stay in the game. Keep enough so that you can recover from (big edge) losers.
Adjust your play to the environment: If there is less competition you can play more hands; if there is more competition you might have to tighten up.
Overcome emotions and biases: Do not chase money and hope for a lucky outcome. Bet too much on a weak investments or doubling down on losers.
Second-level thinking: How competitive is the market and its participants? Fear of missing out or blood on the streets? What are the other market participants thinking and expecting? What do they know I do not know? What do I know what they do not know? Do I have an informational edge?
Bonus: Annie Duke Quotes
"If we aren’t wrong just because things didn’t work out, then we aren’t right just because things turned out well."
"A great poker player ... will still be losing over 40% of the time. ... That’s a whole lot of wrong. And it’s not just confined to poker."
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