Charlie Munger on poker

I just finished reading Poor Charlie’s Almanack: a collection of talks and texts published by Charlie in the course of time, and since I’m a professional poker player I found this quote (talking about people throwing good money after bad) especially noteworthy:

One of the best antidotes to this folly is a good poker skill learned young. The teaching value of poker demonstrates that not all effective teaching occurs on a standard academic path.

Always good to read that someone you respect thinks that what you’re doing isn’t totally useless. Paradoxically Charlie is at the same time taking the moral high ground in most of his talks, while poker is a game that thrives on extracting as much money as possible from people that are not well equipped to gamble (to say it in a nice way).

That said, I think it’s a interesting book that absolutely worth reading. It’s not a book about investing, but more about the mental framework that’s needed to make good decisions and how psychological factors can affect countries, businesses and yourself. And that gets me to the following question: “how useful is it really to read a book where a priori you already know that you agree with the viewpoint of the author?”

On the, admittedly short, about me page of this blog I tell the world that the first book I read on investing is The Intelligent Investor and that I have been convinced that value investing is the right mindset to approach investing since, and secondly that being aware of behavioral biases is important. How convenient is it to read a book that confirms your believes: shouldn’t I be reading a book about technical analysis?

While I don’t think that’s a bad idea, I don’t think it’s especially useful either, and that results in my second consideration. It’s well known that people as a group are overly optimistic about their abilities. Eighty percent of drivers think they are above average, and even when people are aware of this bias it doesn’t change the results. Everybody still believes they are better than the rest.

So how can you truly objectively analyze your own decisions and abilities?

9 thoughts on “Charlie Munger on poker

  1. Adam

    I couldn’t agree more! While I’m not a professional poker player, I did play a significant amount of online poker for throughout my college years (mostly mid-stakes NL, 50k hands/month at my peak).

    I think there are a lot of similarities between investing and poker (analytic thinking, playing the odds), but I find the softer skills have helped out even more:
    – Understanding that bad outcomes can happen even from good decisions
    – Handling volatility over extended periods
    – Sticking to a process during tough times
    – Bankroll/risk/money management

    -Adam

    Reply
    1. Hielko

      Agree that the soft skills are very important, and actually think that this is often what separates average players and good players. Those skills might be a bit more important for a poker player than for investing, because with investing you have plenty of time to review your decisions and logic, reducing the influence of emotions. In poker you don’t have that luxury.

      Reply
    1. Hielko

      Active trading does not really fit in my investment philosophy, and I’m perfectly happy to buy something that I think is significantly underpriced no matter what the underlying trend is.

      And unlike some value investors I would not directly dismiss TA completely. There is significant scientific evidence that the very basic TA-strategies (trend following) do produce abnormal returns, and the same mechanics that make it possible for value investors to pick up bargain priced stocks make it possible that a trend following strategy can work. Both are caused by irrationality.

      There is also a lot of total nonsense in TA were people use complex data mined patterns, but I believe there is actually some sort of reasonable basis behind the discipline. And since I’m already believing that: I don’t think the value of reading a book about TA is huge (actually bought one some time ago, but never managed to read it…)

      Reply
  2. RESTIRW

    “Active trading does not really fit in my investment philosophy”.
    Agreed. Your philosophy in life in general is not geared towards ‘activitiy’ 🙂

    “There is significant scientific evidence that the very basic TA-strategies (trend following) do produce abnormal returns.”

    Then you should look into them, right? Also, I find your argument a bit strange, because if TA works on, for example, a monthly basis, your trading would be much more ‘passive’ and less work than the ‘active’ work of going through annual reports etc.

    Reply
    1. Hielko

      There are also value based strategies that you can use and are more passive than doing the active work of going through annual reports. The magic formula is an example, and if I wanted to go for an easy approach I would probably go for something in that direction. But I have the hope that I’ll be able to add more alpha than those basic strategies. Time will tell if that’s indeed the case.

      The problem with a momentum strategy specifically is that while it statistically works, it’s a bit of a greater fool game: it does not depend at all on the quality of the underlying assets. Given the choice to exploit human behavior by buying assets below intrinsic value, or following the crowd, I’ll go for option one. And there is of course a lot of evidence suggesting that value investing works better than TA: there is no trend following equivalent of Buffet.

      Reply
      1. krullebol

        The Buffett argument is anecdotal, not statistical. It’s a bit like saying there are a few well-known lottery winners and no well-known mailmen and therefore playing the lottery is a better strategy for producing income than working as a mailman.

        Reply

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