Same Cards, Different Games
Some thoughts on "irrational" investing.
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Cheers of joy.
Groans of disappointment.
No clocks, no windows, and plenty of drinks.
Dice thrown, wheels spun, cards flipped, and millions of dollars changing hands every single day.
Casinos are truly one-of-a-kind.
When you enter a casino, where do you go first?
Maybe your vice is craps, because you love the energy of the crowd. Perhaps you are a calculated gambler who prefers to spend his time playing Hold 'Em in the poker room. You might love the rush of throwing it all on black and letting a roulette wheel determine your fate, or you could be the Blackjack aficionado who hits on 16 every single time.
No matter your preference, casinos have a game for anyone with a taste for risk.
Of course, each game has its own rules, and each game caters to different players.
The poker player is calculated: nibbling at small bets and folding most of his hands. Sometimes he bluffs, despite having a 2-7. Other times, he swings for the fences when the odds are in his favor. Poker is a psychological game; the key to winning isn't necessarily the hand you're dealt, but how you play it.
The roulette player knows the odds are against him, but he doesn't care. He's there for the adrenaline rush. The excitement. The thrill of risking it all on a single spin of the wheel. On a long enough timeline, every roulette player goes bust. But in the heat of the moment, every roulette player thinks that he'll hit it big.
The Blackjack player has his bankroll and his system. He knows when to hit, when to stay, and when to split a pair of 9s. He knows how much to bet on every hand, and he knows how to maximize his time on the table. He knows when he's hot, when he's cold, and when it's time to walk away.
While each game has its own rules, they all use the same pieces: chips and cards.
Imagine that you are dealt a pair of 9's in poker. You have a strong hand, so you stick around to see the flop. Then the next three cards are 2 of hearts, King of spades, and 9 of clubs. The odds are in your favor with a three-of-a-kind, so you double your bet. Assuming no one has pocket Kings, you have a high chance of winning this hand.
Now imagine someone else watched you play, but they thought you were playing Blackjack instead of poker. You had two nines and decided to double up. To them, that would be insane. Who doubles down when they have 18? You're just asking to bust.
Same cards, same moves. For the poker player, it makes sense. For the Blackjack player, it is insane.
Of course, this situation would never happen in a casino. Poker players sit at the poker tables, and Blackjack players sit at the Blackjack tables. It's easy to see what games everyone is playing when the tables are clearly marked.
But what if it wasn't so easy to distinguish between games? What if there were no separate rooms and tables? What if everyone played different games on the same table at the same time?
That would be chaotic, wouldn't it?
The crazy thing is that this table exists. We just call it the stock market.
Think about it: everyone is buying and selling the same stocks on the same exchanges at the same time. The difference isn't what, but why they are buying and selling. This why tells us what games they are playing.
76M shares of Tesla stock traded hands yesterday alone, but no two investors bought or sold for the exact same reasons. The 20-year-old day trader reading 5-minute candle stick charts believes Tesla is undervalued if he can buy and sell call options for a profit in 30 minutes. The university endowment that averages 10-year holding periods believes Tesla is overvalued if they think it will lose market share to incumbents over the next decade.
Tesla stock is simply Tesla stock, regardless of who owns it. Is it overvalued or undervalued? Like the pair of 9s, that depends on what game you're playing.
Your opinion of a stock's value is just as much a result of the game that you are playing as it is of the stock itself, and we're all playing different games with the same pieces on the same table at the same time.
A 25-year-old with a 40-year time horizon sees the current market decline as an investment opportunity, but the 70-year-old retiree sees it as a retirement killer. Again, your investment decisions are driven by the game that you are playing.
As Morgan Housel said, "The market is rational but investors play different games and those games look irrational to people playing a different game."
The market is rational but investors play different games and those games look irrational to people playing a different game.
— Morgan Housel (@morganhousel)
Apr 12, 2021
Same cards. Same stocks. Same table. Same market. Different games. Different outcomes.
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