Novel Investor

Compounding investing wisdom...

Ed Thorp on Learning from Gambling

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Ed Thorp has a skeptical mind. That’s what got him to question the belief that you couldn’t beat the casino. That same skepticism eventually drove him to question financial markets. During an interview, Thorp explained that journey and what he learned.

The big difference between gambling and investing is in the probabilities. Most gambling games have fixed probabilities. Precise accuracy is possible.

In the game of blackjack, if you know the number of decks, then you know how many of each card exists (assuming the House plays fair), and you can work out the odds from there.

Not so with investing. The complexity of markets, the number of factors involved, make precision impossible. Here’s Thorp: Continue Reading…

Steven Crist: Second Level Thinking at the Racetrack

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What does horse racing have to do with investing? Everything. The key is to think of “horses” as “stocks.”

Most gambling, like blackjack, roulette, or craps, involves betting against the House. Not so at the horse track. Instead, you bet against other bettors and your, and everyone else’s, bets on different horses (stocks) change the odds.

Not surprising, how people approach betting on horses is fairly similar to how people bet on stocks.

Steven Crist says as much in a chapter he wrote for Bet with the Best, as he explains how to bet on horses. But as I said at the top, swap out “horse” with “stock” and you’ll see the similarities with investing: Continue Reading…

Quarterly Reading – Spring ’19

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The end of March means it’s time for another quarterly reading update. A vacation in February got me back on track reading-wise. It’s amazing the number of pages you can get through when you disconnect from the internet for 10 days. Anyways, onto the books.

Here’s what I’ve been reading the past three months: Continue Reading…

Where Less is More

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Compounding works because somebody started something decades ago and never stopped. When you combine consistency with a simple investment plan some wonderful things happen.

Unfortunately, simplicity is often overlooked.

And I’m not just talking about investment plans. Yes, the finance industry is notorious for coming up with complex strategies to warrant the high fees they’re charging. Can a simpler strategy produce similar results? Most likely. But who would pay a similar high fee for it?

I may be going out on a limb here, but it seems to me that if the industry spent more energy on getting clients/customers to maintain consistency and less energy on creating elaborate strategies, both the industry and their clients would be better off in the long run. Conveniently, consistent compounding benefits both investors and those who charge low fees too. Continue Reading…

The Downside of Chasing Huge Wins

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I briefly touched on John Maynard Keynes’s track record on investments in his personal account in the last post. I wanted to take a deeper dive into the impact margin loans had on his results.

For those not aware, a margin loan is borrowed money used to buy securities in an attempt to juice returns. The results can be exceptional if things go right or horrendous when things go wrong.

When you borrow money against an asset, and the value of the asset falls, bad things can happen. The same is true when borrowed money is used to buy an asset like a stock, that then declines in value.

The main reason is due to minimum margin requirements. Lenders don’t like to lose money any more than we do, so minimum margin requirements help to safeguard lenders from losses.

But they don’t protect you from losses. In fact, it does the opposite whenever the minimum gets triggered. At that point, you’re hit with a margin call and forced to cover the difference. So you either scramble to come up with more money or are forced to sell. Forced selling is the typical outcome, at what is likely a (big) loss. Continue Reading…

Lessons from Keynes the Investor

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In one volume in the 30 volume set that makes up The Collected Writings of John Maynard Keynes lies practically everything you need to know about Keynes the investor. The entire volume is a collection of economic articles and correspondence, but it’s the first chapter that is the most informative.

That’s where you learn about his performance history both personal and professional, his economic views around some major historical events, and how he thought about investments and markets at the time.

The history alone makes it interesting. But because it’s Keynes, that chance to critique an economist’s investment performance makes it appealing on another level.

Arguably he makes it difficult to do. He didn’t have a great start but he learned quickly and finished strong…for the most part. His professional track record was great, running the Chest Fund and advising for two insurance companies and several investment trusts.

His personal account was easier to criticize, as the first lesson shows. Continue Reading…

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