Investment Warrior Report Archive Article

The Game of Investing

There are many analogies between the investment markets and some of the games with which we are all familiar. By understanding some of our illogical emotions that occur in simpler games, we can prepare ourselves for the demands that a reasoned and disciplined investment strategy such as those used by The Lussenheide Investment Warrior will place upon us as investors. Certain disciplines in other games often do not feel right, yet from experience most of you will recognize that following these strategies are both wise and prudent.

I have been an active baseball player and fan since early youth. I know that in a close game with a man on second and third base and with less than two outs, the best strategy with a good hitter at the plate is to give him an intentional walk. This allows for a force play at the plate and may even result in a double play! Yet as sound as this strategy is, I never have enjoyed it or had a good feeling about it. After all, is not the game about always getting people out? Isn’t it about not letting people get on base? It just does not feel right to give away a free base on balls to the opposing team. Irrespective of our feelings, walking the man is still the best strategy.

Similarly in football, when you are on your own 35 yard line and have a fourth down with a yard or two to go, it probably makes the most sense to intentionally give the ball to the opposition through the use of a punt. Punting is an excellent defensive strategy. Yet… it never seems to feel right to just give the ball to the other team through the use of a punt.

Another familiar scenario involves the game of "21" also known as "blackjack." The object of the game is to be dealt cards which total 21 or less, without going over and to beat the dealer's hand, who must draw to a minimum count of 17. Several books and computer models have analyzed "21" and developed basic mathematical strategies based on probability which give the most efficient way to play your hand. One of the most difficult scenarios a blackjack player faces is when he holds cards totaling 16 and the dealer is exposing a face card or a 10. Basic strategy says that the wisest course of action is to draw yet another card for yourself. It feels absolutely wrong to risk going over 21in this situation, yet it is the correct risk to take according to probability.

In any of these three examples there was no guarantee that by using the appropriate strategy everything would always turn out as an immediate advantage. On top of the fact that they may feel wrong, the next hitter can end up hitting a bases loaded grand slam homer, the punt returnee may go for a touchdown and that next card that you draw may put you over 21!

Investing is perhaps the most involved and sophisticated game known to mankind. Market timing techniques reduce risk and can enhance investment return over time. Still, just like in our examples, a market timing signal may not always feel right. It may feel as if the market is going to go higher when a sell signal occurs, or it may feel as if the market is headed down when you receive a buy signal.

A market timing signal is not always going to turn out the way you desire. Signals may produce a small loss or get you back into a market at a higher price than when you left it. The question that we must ask ourselves is that in spite of feelings to the contrary, will we be loyal to the basic strategy, patience and discipline that mathematically tested market timing models demand? Sticking with the system and playing the odds will profit you in the long run. Consider this the next time you get a weird feeling at "The Game" of investing!