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29-05-2011, 07:32 AM
May 29, 2011
small change
Investors, learn to play your cards right
Just like a good poker player, a good investor must know when to hold and when to fold
By Dennis Chan, Deputy Money Editor
Those of us who regularly squirrel away our income into some kind of long-term savings plan like to think of ourselves as investors.
But unless these savings are channelled strictly to instruments that offer guaranteed or near-guaranteed returns and protection of principal, such as fixed deposits or Singapore Government bonds, there will be an element of chance that comes with our investment choices.
Does this make a stock market or property investor a gambler?
Most would answer in the negative.
But in reality, there is a fine line between investment and gambling and this is often blurred in times of great mania.
Who can forget the tulip mania in the Netherlands in the early 17th century when already overpriced tulips were bid up twentyfold in one month before the bubble burst?
Were these traders investing or gambling?
In the stock market, if you acquire a blue chip with a long-term horizon, you are called an investor. If you buy a stock on a whim or tip for short-term gain, you are known as a punter.
Property investment, which has often been touted as a long-term play, is not immune either as a game for the inveterate gambler.
In every boom-bust cycle, there are some property owners who will be caught short. Some will suffer big losses, others bankrupted.
There is, of course, a significant difference between unadulterated gambling - in which a stake can be won or lost on a single outcome - and traditional investments.
Unless you are playing with money you do not have, a stock or property investment rarely wipes you out even if the purchase is mistimed. Also, the opportunity to recoup losses remains as long as one stays invested.
I am not against games of chance that are of a more cerebral nature like mahjong and poker. I do not have a problem with certain lottery games that are 100 per cent based on luck, like Singapore Pool's 4-D.
In modest amounts, the 4-D game can serve as a social lubricant.
Among distant relatives who may have little in common with one another other than blood ties, gossiping over lottery results can sometimes become a conversation lifeline during the occasional family get-together.
Don't get me wrong. I'm not promoting gambling or trivialising the many social and family ills that come with it.
Gambling is abhorrent for the human frailties it engenders.
But instead of banning activities that are related to gambling, it is better to acknowledge the problem for what it is - a mindset.
The key to curbing problem gambling is education, recognising that a wager can never be anything other than an entertainment expense.
When I was a teenager, I came across a book titled The Education Of A Poker Player by Herbert Yardley at the local library.
It was written as a semi-autobiography, although much of it is generally accepted as puff. It was a fascinating read, nonetheless.
Yardley was an American cryptologist who became famous for breaking the Japanese diplomatic codes after World War I.
Thanks to his work, the Americans were able to read the Japanese government's mail. This gave the United States government a huge advantage during negotiations with imperial Japan in 1921 over the permissible relative strengths of their naval forces.
However, it was not Yardley's clandestine work that made his book a success. It was his poker-playing skills.
Yardley played poker conservatively, meaning that he would frequently fold when he did not have a strong face card.
It's boring. Not at all like the royal flush hand that celluloid characters typically pull out at the drop of a hat.
But such a patient approach allowed him to set up a winning bluff from time to time.
Given his track record of folding his cards with such regularity, few players would dare to bet against him on the odd occasions he did not fold.
Although I played poker only sporadically, Yardley's book changed my perspective of the game as well as helped to shape my philosophy in life.
The popular axiom, 'Life isn't fair. You play with the hands you are dealt with', might well have come from a poker player.
It is a philosophy that gels nicely with our concept of social mobility and meritocracy.
'A card player should learn that once the money is in the pot, it isn't his any longer' is another poker axiom that can also be applied to our lives.
In poker, a player should not be emotionally influenced by the amount he has already put into the pot to determine whether to stay or fold.
This can be translated into an investing principle: Avoid recouping your losses from a bad investment by averaging down your costs, that is, buying the same shares at lower prices when the price of the shares begins to fall.
You would probably end up losing more.
I don't play poker any more. But I remember the principles that make a good player.
These have stood me in good stead in my investment decisions.
dennis@sph.com.sg
small change
Investors, learn to play your cards right
Just like a good poker player, a good investor must know when to hold and when to fold
By Dennis Chan, Deputy Money Editor
Those of us who regularly squirrel away our income into some kind of long-term savings plan like to think of ourselves as investors.
But unless these savings are channelled strictly to instruments that offer guaranteed or near-guaranteed returns and protection of principal, such as fixed deposits or Singapore Government bonds, there will be an element of chance that comes with our investment choices.
Does this make a stock market or property investor a gambler?
Most would answer in the negative.
But in reality, there is a fine line between investment and gambling and this is often blurred in times of great mania.
Who can forget the tulip mania in the Netherlands in the early 17th century when already overpriced tulips were bid up twentyfold in one month before the bubble burst?
Were these traders investing or gambling?
In the stock market, if you acquire a blue chip with a long-term horizon, you are called an investor. If you buy a stock on a whim or tip for short-term gain, you are known as a punter.
Property investment, which has often been touted as a long-term play, is not immune either as a game for the inveterate gambler.
In every boom-bust cycle, there are some property owners who will be caught short. Some will suffer big losses, others bankrupted.
There is, of course, a significant difference between unadulterated gambling - in which a stake can be won or lost on a single outcome - and traditional investments.
Unless you are playing with money you do not have, a stock or property investment rarely wipes you out even if the purchase is mistimed. Also, the opportunity to recoup losses remains as long as one stays invested.
I am not against games of chance that are of a more cerebral nature like mahjong and poker. I do not have a problem with certain lottery games that are 100 per cent based on luck, like Singapore Pool's 4-D.
In modest amounts, the 4-D game can serve as a social lubricant.
Among distant relatives who may have little in common with one another other than blood ties, gossiping over lottery results can sometimes become a conversation lifeline during the occasional family get-together.
Don't get me wrong. I'm not promoting gambling or trivialising the many social and family ills that come with it.
Gambling is abhorrent for the human frailties it engenders.
But instead of banning activities that are related to gambling, it is better to acknowledge the problem for what it is - a mindset.
The key to curbing problem gambling is education, recognising that a wager can never be anything other than an entertainment expense.
When I was a teenager, I came across a book titled The Education Of A Poker Player by Herbert Yardley at the local library.
It was written as a semi-autobiography, although much of it is generally accepted as puff. It was a fascinating read, nonetheless.
Yardley was an American cryptologist who became famous for breaking the Japanese diplomatic codes after World War I.
Thanks to his work, the Americans were able to read the Japanese government's mail. This gave the United States government a huge advantage during negotiations with imperial Japan in 1921 over the permissible relative strengths of their naval forces.
However, it was not Yardley's clandestine work that made his book a success. It was his poker-playing skills.
Yardley played poker conservatively, meaning that he would frequently fold when he did not have a strong face card.
It's boring. Not at all like the royal flush hand that celluloid characters typically pull out at the drop of a hat.
But such a patient approach allowed him to set up a winning bluff from time to time.
Given his track record of folding his cards with such regularity, few players would dare to bet against him on the odd occasions he did not fold.
Although I played poker only sporadically, Yardley's book changed my perspective of the game as well as helped to shape my philosophy in life.
The popular axiom, 'Life isn't fair. You play with the hands you are dealt with', might well have come from a poker player.
It is a philosophy that gels nicely with our concept of social mobility and meritocracy.
'A card player should learn that once the money is in the pot, it isn't his any longer' is another poker axiom that can also be applied to our lives.
In poker, a player should not be emotionally influenced by the amount he has already put into the pot to determine whether to stay or fold.
This can be translated into an investing principle: Avoid recouping your losses from a bad investment by averaging down your costs, that is, buying the same shares at lower prices when the price of the shares begins to fall.
You would probably end up losing more.
I don't play poker any more. But I remember the principles that make a good player.
These have stood me in good stead in my investment decisions.
dennis@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/