Did everyone else get caught up in the poker fad (particularly, Texas Hold ‘Em) that swept through the US about 10 years ago? I used to play in friendly games with co-workers for very modest amounts of money, say $5 buy-ins that could last for an hour a game or-so. Thus, even though I was a reasonably good player, the most valuable thing I won was quality time with friends, entertainment, and knowledge about the rich lingo.
Lots of sports metaphors have crossover appeal in finance and investing. Even universally acknowledged modern portfolio theory statistics draw upon sporting terms, like “batting average”. Poker and other sports are, perhaps, equally well suited to describing the statistical, fundamental quantitative attributes of winning and losing typical to investment and economics. Sports metaphors, particularly baseball, are certainly more common. You’re more likely to hear about a successful investment manager “making a home run” with their investment picks rather than “drawing the nuts”. You are more likely to hear a failing investment product “striking out” rather than “drawing dead”.
However, since poker is a betting and gambling game where bluffing and personal dynamics are potentially more important than raw fundamental, statistical strength, it is uniquely well-suited to describing investor behavior. All the messy, internal, qualitative, psychological factors get equal weight to quantitative factors (pot-odds, numbers of outs) in poker culture.
Do you know the poker term “tilt”? It can also be used as a phrase, “going on tilt”? Imagine you have a big poker hand, which you are mathematically favored to win, but you lose anyway. Bad luck, right? It happens. But no, human beings are emotional. Bad luck affects your behavior. Your frustration can make you aggressive, irrational, or double-down on bad bets. Smarter, cooler players can take advantage of your emotional provocation to extract even more money from you, so the cycle of frustration and irrationality feeds on itself and gets worse.
Sometimes when superstar money managers start to underperform, sometimes their ego gets in the way and they begin to react like a poker player on tilt. It’s all I could think about when reading this Fortune article about PM Jeff Gundlach.“http://fortune.com/2016/07/14/jeffrey-gundlach-bond-king-doubleline/”
They may rail against their bad luck or “worst possible environment” for their investment, which has experienced a “perfect storm of negativity”. They become impatient for redemption. To make up for previous losses, they will double-down on losing bets hoping for a huge mean-revision which will make their positions whole again. For instance, Gundlach made news this weekend suggesting investors sell everything in their portfolio except for gold. Now, I don’t have a crystal ball and I cannot guess how different asset classes will perform in the short term. He could be right; I can’t predict the future. But, to an outside observer, it looks a little like he’s reacting emotionally. It looks like a poker player going on tilt.