Category Archives: Off Topic

The world’s vultures are vanishing

The Economist has a sad piece about the world’s vulture population. In Africa, there are 11 species of the bird and 6 of those are at risk of extinction and 4 are critically endangered. In the rest of the world, the situation is apparently not a lot better. A big reason for this is the use of diclofenac, a drug given to livestock that is deadly to vultures when they eat the carcass of an animal that has been treated with it. The article doesn’t specify if Alpha Vultures are also at risk.


Incentives matter

I suspect that a lot of my readers also visit the Whopper Investments blog, so you might have noticed that I gave this post an identical title as his last one: Incentives matter. Whopper summarizes my thinking about the subject in the following sentence: “I believe that people are always going to do what’s in their best interest”.

This is of course very important when you scrutinize what insiders are doing at a company, but it is equally true when you read an article online. What are the incentives of the author? I recently wrote a post for Seeking Alpha about Deswell Industries. For regular readers of my blog not a new name since I own it since the beginning of 2012. At the time I spend little time about looking at the underlying business, my main concern was whether or not the company was potentially a fraud since it’s doing business in China.

So my incentives for writing this post, and publishing it on SA:

  1. Reviewing and updating my investment thesis
  2. Gain some exposure on SA, maybe attract some new readers to my blog
  3. Last but not least: make a few bucks

SA pays authors a minimum of $150 dollar for a good article on a under-followed micro/small cap while there is minimum payment of $500 dollar for an article that is selected as an “Alpha Rich” idea. So what is your incentive as a writer: to write a piece that convinces the SA editors that the stock offers an asymmetrical risk/reward ratio! It’s no longer about publishing the most balanced research. Of course you should mention some negatives because you sound smarter if you do, but it’s easy to downplay a specific issue. I wish it wouldn’t be true, but after writing the article I realized how you are tempted to do it. Even without the money the incentive would be there: it’s also an ego thing.

In the case of Deswell Industries I don’t think it would have been too hard to write an article that sounded a lot better. You have the downside part of the story covered with the large amount of cash on the balance sheet, and it’s easy to write for example a nice story on how the business has decent long-term prospects (not impossible) or how the leasehold land of the company could potentially be a very valuable asset (for the record: I don’t think this is very likely, but you see on SA a reader that is trying to make this case). It doesn’t even matter if you fool the SA editors or not, the end result is the same.

So what does this mean for me?

My number one motivation of starting this blog is to improve my investment process and skills. I often think about my write-ups as a sort of public visible checklist (without the checks). By writing an ‘exclusive’ article for SA I’m giving myself a competing incentive, and that is a dangerous thing because it’s already easy enough to be biased towards your own idea’s. So you don’t have to expect a lot of other SA articles from me in the future, although I might occasionally review an existing position (or maybe write about something I don’t own).

A slightly related topic is my decision to keep the blog free from advertisements. That would also introduce a competing incentive: away from the quality of posts and towards the quantity of posts. I don’t think advertising revenue would be material anyway, so no reason to do something that subtracts from the main goal of the blog.

What should it mean for you?

Nothing! You should be doing your own thinking and research anyway. But when you read something it still pays to think about the incentives of the writer, because it can tell you where you could start looking to find the weak points in the thesis. Unfortunately this means on SA that authors have an incentive to make the story sound as positive and convincing as possible. I understand why they are doing this, because it’s at the same time also an incentive for people to write true “Alpha Rich” articles, and I think they are succeeding with that part of the equation. I do see more interesting articles appearing than in the past.

The differences and parallels between poker and investing

In the investing world people love to draw parallels between poker and investing, and rightly so since there is a strong link between the two activities. For example risk taking, risk management and being process oriented all play a crucial roll in both. But most of the parallels are drawn by investment professionals that try to project wisdom from a field they understand to a game they don’t know a whole lot about. So as a poker professional I thought it would be a nice idea to explain some of the more subtle differences, and tell you some of the lessons that I learned from poker.

Random outcomes and knowledge inequality

I basically know nothing about chess besides the rules of the game, but I think that it isn’t hard for a novice to figure out who’s a good chess player and who isn’t. The amount of luck involved in chess is relative low, and you can simply check ELO-ratings to see how good someone is. I understand that Magnus Carlsen knows what he’s doing. When you add a significant random element to the game the evaluation of skill becomes a lot harder, and it becomes easier for mediocre players to pretend that they are better than they are.

In poker there is a vibrant market place for coaching. Poker is a complicated and evolving game: what you read in books is either outdated, never correct to begin with, or theoretically correct, but very general and not directly usable. Figuring everything out on your own isn’t doable, so hiring someone more knowledgeable to speed up your development as a player makes sense. But this is easier said than done, because how do you find a good coach? There are plenty of mediocre players that aren’t very good at poker, but good at marketing themselves (disclosure: I also offer poker coaching and I like to think I’m bad at marketing and good at poker).

You can’t simply look up an ELO-ranking and determine someones skill level, and if you are not an expert level poker player evaluating how good the advice is that you get isn’t trivial. For those that know something about poker, take for example this spot: you are out of position in early position at a six handed table with ace-queen offsuit and you get re-raised by the button (an expert level player). What should you do? I could easily create a convincing argument for folding, calling and re-raising. You are out of position with a hand that is dominated by ace-king and premium pocket pairs, so fold? It’s one of the better starting hands in your range and you don’t want to be exploited by bluffs, so call? You have blockers in your hand that reduce the probability that your opponent has aces, ace-king or queens,  so re-raise as a bluff? If you are a novice poker player there is absolutely no way that you can pick the right option with the correct argument, but feel free to take a stab at the problem in the comments :).

In the investment world the inequality in knowledge is an even bigger problem. You have a huge number of people that know nothing about investing, don’t want to educate themselves, but they do have money and they do want to do something with it. So you can basically sell them anything if you have the right sales pitch, and it’s even harder to evaluate the skills of an investment manager than the skills of a poker player. If you carefully analyze the last one or two years of someone’s play you can determine with a reasonable narrow confidence interval someone’s winrate. Getting a sufficiently big sample size for an investment manager is a lot more problematic, and once you have a big sample size odds are that the historical sample is not representative anymore for the current situation.

Sad news is that it’s probably a problem that can’t be fixed, but that’s a good thing for active investors. You cannot outperform without someone else under-performing.

Playing tight

Buffett is known for saying that there are no strikes in investing, implying that an investor will do best if he is extremely selective with the stocks he buys. On the surface a similar principle seems to be true for poker since most winning poker players play tight: meaning they are selective with the hands they play as well. Problem is that this is where the comparison breaks down: in poker there are ‘strikes’ for not playing because you are forced to put money in the pot through antes and blinds. You have to be selective with the hands you play, but you can’t wait for a fat pitch.

As a matter of fact, it’s even more extreme. If you don’t want to leave money on the table you should play hands when you expect to make zero profit! The reason for this is that a hand with an expected value of zero on it’s own adds value to the better hands that you play. As an extreme example: if you would play only aces (the best starting hand in holdem) an intelligent opponent wouldn’t give you a lot of action, if any at all. But if you also add some crappy hands to your range that individually don’t make (but also don’t lose) any money he is suddenly forced to give action to your aces because otherwise he could be bluffed all the time by the weak hands. So the expected value of your best hands are improved by adding very marginal hands to your range. I don’t think anyone would advocate investing in stocks when you don’t expect to make money.

Pick your own style

Another difference is that there are probably a lot of things that can work when investing. You can buy NCAV bargains, distressed debt, buy growth at a reasonable price, high quality moat companies and that’s just the tip of the iceberg of potential profitable strategies. Common investment advice is that you should stick to a strategy that you are comfortable with. How good that advice is for investment is another discussion, but it certainly isn’t good poker advice.

In poker there is no big selection of different viable long-term strategies. Against bad players there are a lot of winning strategies, but against each other some strategies are better than others. A strategy in Tic-Tac-Toe that would start at the edge of the playing field would be an example of a dominated strategy, and it wouldn’t be successful unless your opponent is really bad. In poker you also can’t really choose how you want to play if you want to make money because playing a dominated strategy gives your opponents room to exploit you. With knowledge about the game increasing strategies are slowly converging to a game theory optimal solution. People unable or unwilling to adapt ‘their style’ drop out.

Wrapping it up

Enough rambling, time to wrap it up before this post gets even longer. Hopefully you learned something new, and if not: sorry for wasting your time ;).

Austrian Economics: the FED created the poker bubble…

As a professional poker player and as someone with an interest in economics and finance you’ll get my attention when I see an article called Monetary Origins of the Poker Bubble. In the article the author, a proponent of the Austrian school of economics, makes the argument that the poker boom was caused by the FED due to artificial low credit rates. Cheap credit entice businesses and individuals to spend money, and if it’s too cheap it could potentially create a bubble. It’s probably a good explanation for the US housing bubble, but I think this is far fetched at best to use this as an explanation for the sudden popularity of poker. I’ll try to explain the main flaws in his argument one-by-one:

1. Don’t underestimate the Lollapolooza effect

The author dispels the notion that the introduction of televised poker with hole card camera’s and the story of Chris Moneymaker were the main ingredients to fuel the poker boom because hole cams were introduced in 1999 on British television without causing the poker boom, and before Chris Moneymaker won the main event it’s popularity was already rising. Charlie Munger is known for using the term Lollapolooza effect to describe multiple factors acting in the same direction to explain explosive outcomes. I think that’s exactly what happened with poker. The introduction of hole card camera’s, the possibility of playing online, Chris Moneymaker grabbing headlines were all factors that worked together to make an explosive growth in popularity possible. The author, Peter C. Earle, writes:

But fads and surges of popularity come and go; these explanations hardly account for why, in a short amount of time, tens of millions of people suddenly flooded into a familiar—indeed, 150 year old—American card game, frenetically expending tens of billions of dollars on it.

The poker boom wasn’t a case of a 150 year old sport that suddenly skyrocketed in popularity because credit was cheap. It became not only for the first time in it’s history a good spectator sport, it was also the first time you could play it easily online from your home. Throw a good story on top of that and you have an explosive mix. I also doubt that the 2003/2008 period was the first time in the history of poker that interest rates were low. So why didn’t we see a poker boom somewhere in the past?

2. Was it a bubble?

I’m not the only one to criticize the author, and he actually already addressed some concerns in this blog post. The author asserts that the explosion in poker’s popularity was a classic speculative boom. I’m not so sure about that. Did we have a Fifty Shades of Grey bubble the past years? Is there an Angry Birds bubble? I don’t think anyone is going to answer yes on those questions. The books and games are consumption goods, and just because they are popular for a limited time doesn’t mean that it’s a bubble. Poker is the same: it’s not an asset class that you can speculate on, it’s entertainment. If it’s popular people spend more money on it, but nobody is buying poker chips expecting that they can resell them a year later for more money. A lot of people buying poker books doesn’t make a bubble.

3. The poker ‘bubble’ didn’t burst in 2006

The biggest issue that I have with the article is probably the fact that there is little reason to believe that the poker bubble burst in 2006. So not only do I think that there is no causation between low interest rates and the popularity of poker, I also don’t think there is any significant correlation. On Poker History we can find some data on the peak number of players online in a given month:

Total Peak Players - All Networks

Looking at the above graph it seems hard to argue that the poker boom ended in 2006. Only after the United States Department of Justice pressed charges against the three biggest online poker operators on 15th April 2011 we see a big drop in activity, a day known as Black Friday in the poker community. Regulatory developments are a way better explanation of the popularity of poker than interest rates. The big drop in people participating in the 2007 WSOP Main Event, used by Earle as an argument that the poker ‘bubble’ deflated simultaneously with the housing market, is also explained by regulatory developments. In 2006 the UIGEA act was passed, resulting in the exit of PartyPoker from the US market. At that time PartyPoker was the biggest online poker site, and a substantial amount of players were send to the live tournaments through online satellites.

The fact that a number of poker shows stopped broadcasting in the 2006-2008 time frame is also a poor indicator for a bubble bursting. Those shows were sponsored by the online poker sites, and with a number of them withdrawing from the US market due to the new regulations it’s not a surprise to see some shows getting cancelled.


I think the premise that the FED created the poker bubble is flawed in almost every way possible. Something can be temporarily popular without being a bubble, the popularity of poker continued far after the FED increased interest rates, and the regulatory changes provide a more logical framework for explaining the decline in popularity. And if Austrian economics explain why we have had a poker bubble, can it also explain why we didn’t have a table tennis bubble? And how does it explain the “pogs” bubble in the 90s?

The popularity of poker and low interest rates are in my opinion just an accidental weak correlation, not an explanation. And you can certainly not explain developments in the brick and mortar poker business while ignoring online poker or regulatory changes.

My pick for 2013

Since it looks like we survived the predicted apocalypse it’s time to look forward, and figure out what to buy to get rich in 2013. Some of my fellow bloggers already published a few lists with boring, well capitalized and undervalued stocks that could perform well next year. But we all know that that’s not going to cut it if you want to make serious money. To hit it big you need to be investing in the next hot thing, and what’s hotter than nanotechnology?!?!

This is where Nano Labs (CTLE) enters the picture, to quote their latest 10Q:

The Company is pursuing opportunities for global market leadership in the field of nanotechnology, a sector with the prospect of $2.6 trillion in global revenues – representing 15 per cent of all projected global manufacturing – by 2014.

With a current market cap of $165 million CTLE is the steal of the century. The mobile handset market is smaller than a TRILLION dollars (added some emphasis to make it clear just how big that number is), and we all know how valuable Apple is! A quick look at the balance sheet illustrates the tremendous opportunity available:

Nano Labs Corp balance sheet

The company has literally zero assets: so it’s all upside from here! The income statement shows an equally promising picture with zero revenues. How the company will be able to develop the next generation of technology without any assets is a question that remains to be answered, but only a naysayer would focus on those trivial details. Nano Labs obviously doesn’t foresee any problems given the roadmap we can find in the latest 10Q:

Nano Labs roadmapLooks like a plan that can’t fail. With such a tight schedule I image that I’m rich in time for the summer holidays so I can finally buy my own tropical island (surprisingly affordable: for a half million USD you got your own little island). Or maybe I should start with a zombie proof house: better safe than sorry. Or an even better plan: simply do both!


No position. If you are stupid enough to buy this BS you deserve to lose your money.