I play a friendly poker game every Friday night. The same group of guys (more or less, including a very few women) have been getting together on Friday for something like 40 years. It’s a friendly game. We set limits so it can’t be anything but: $.25 maximum bet, 3 bumps maximum number of raises in each round of betting. If you end the night up or down $10, it was a big night. We play a lot of crazy games with wild cards and different blackjack variants (we play no games that are designed to bet against the dealer).
Why do I bring this up on an investing board? Because there are interesting observations about human nature that are relevant to investing.
We play a number of stud like games, that means that your hand is revealed one card at a time with a round of betting after each deal. A few of the guys I play with can be relied upon to want to see the card they would have received if they had not folded. The desire to see that card is so they can pat themselves on the back for the wise decision if the card would not have improved their hand, or conversely, to kick themselves in the butt if the card would have made their hand better. Of course, you have to ignore the affect of folding on all the other hands that are still in the game.
What’s this got to do with investing? A number of folks continue to follow stocks after having closed a position. They want to reinforce the wisdom of the decision if the stock performance erodes - or presumably “learn from the mistake” if the stock soars. Of course, the sell may have been a well reasoned decision based on a valuation that has gone too high due to momentum and the continued tracking of the stock is simply waiting for the PE to become more realistic so that the investment can be re-entered at a better price point. But if that’s really the case, then you would also have to consider how the funds from the sale had grown or shrunk during the observation period. I don’t know a single investor who keeps track of comparative performance.
Another observation from Friday Night Poker: we have a saying which will oft be repeated: “Never Fold.” We play a number of games where the wild cards might change so each round of dealing holds the potential for significantly improving an apparent losing hand while simultaneously damaging an opponent’s apparent winning hand. If you fold, there can be no doubt that you will lose whatever bets you’ve put in the pot up to that point. If you never fold, you eliminate the risk of bailing out of a winning hand. From an investor perspective, this translates directly to “never sell”. You don’t know ahead of time which of your investments might go on to be a big, multibag winner, but if you never sell you eliminate the risk of selling the one big winner which will potentially compensate for hanging onto all the losers in your portfolio. But, if you never sell and buy two new “gems” or “rule-breakers” every month, at the end of the game (I guess that would be the day you die), you will presumably have enough big winners to more than offset all the crappy investments.
But here’s where the poker analogy gets pretty hard to follow. Obviously, I don’t play poker to make money - it’s an excuse for a social gathering. At the end of the night maybe I’m up a few bucks, maybe I’m down - there’s always next week. But if you intend to never sell any of your investments just why are you an investor? Is it really all about beating an index? Is that the point? Now that’s a legacy to take to the grave, “Yup, ol’ Bill beat the S&P by 500 points. Damn, he was good.”