You'll never pick winning shares all the time.
No tips this week, I'm content to let my existing ones stew for a while as they are not doing badly overall.
Poker face
Someone I know very well is a professional poker player. He manages to live quite well on his winnings from the game, something only a minuscule minority of players will ever do.
A lot of gamblers can't be believed, boasting about winnings but keeping quiet about the far greater losses, but this chap keeps detailed records and I've seen them. In fact I set up the spreadsheets to enable his record keeping, quite an achievement for me who is so computer illiterate that until then I thought a spreadsheet was for making beds.
Like all gambling, the great majority lose over time and in poker, they lose to people like him. The difference between poker and many other popular forms of gambling is that it is not pure luck like roulette or the lottery but possesses an element of skill, though it still retains a substantial chance proportion too.
The effect for poker players of this mix of luck and skill is that there are wide variations in short-run performance because of the excessive influence of the luck element. Hence the need for a large bankroll to cover the bad patches.
Players talk of the "bad beat" which is when making the right play with the odds in your favour that still loses because the odds are only likelihoods, not certainties. But in the long run playing the odds, the math, having an edge, will win overall against people who don't have this knowledge or have it only inadequately.
Skill vs luck
The balance of skill to luck changes in favour of the former in the longer run over months and years, because the edge of a superior player will out. In the very short run though, it is the other way round with luck often outweighing skill, so that even a lousy player will win sometimes. This permits the foolish who have a good run, which is more due to luck than they imagine, to go on to be skinned eventually.
My friend tells me of a spell in Vegas last year. He was at a poker table when it was joined by another Brit whom he recognised as a familiar UK television sports commentator, though he would be unknown to Americans. The guy played for a while then left the table.
My friend remarked to me that this fellow was a poor player, making the point because if you know who he is, you might expect him to be reasonably good. "So he lost a lot?" I asked. "No, he won" was the response. In other words the guy was lucky not skilful. He might win at one game or a few but keep on playing and he is likely to end up as most players, by losing.
Investing is not that different. You might think gambling frivolous but actually it gave rise long ago to more serious subjects like the math of probability and the insurance business for example.
Like poker, in the very short term, day trading shares say, luck assumes a very large proportion and most such investors will lose. In the longer term, chance is still present but its proportion in the luck/skill mix will diminish. A much greater percentage of long-term share investors will make money than will very short term players. Doing nothing is itself a part of the skill required for the long-term game.
What about value?
What is the mixture of luck and skill in value investing? Very hard to say. The holding period of anything up to a couple years or more is long enough for the luck to be of lower proportion than a very short-term chart play.
The skill part in value comes in identifying the features of an unfairly low-rated share by means of the usual fundies. But having done that, you are then largely in the hands of luck. Value doesn't guarantee success every time, the share can still go wrong despite your best downside minimising precautions.
I believe that the fundamental filters used by value investors to select shares are enough to alter the odds in your favour sufficiently well to make decent money in time. You can never get rid of the chance factor, share investing is a risk game, but like the winning poker player, you should bet only those hands where you think have an edge.
You'll suffer the bad beats, I know I have, but you have to continue believing that the right play with the wrong result was still the right play. Make enough right plays and enough of them will come good to justify the risks of being in the game.
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