Updated: Feb 15
Years ago investor Mohnish Pabrai lost big on an investment in a troubled lender called Delta Financial. Soon after he did an interview with SmartMoney magazine:
SmartMoney: How do you deal with Delta Financial, profession- ally and personally?
Pabrai: Investing is a game of probability. Sometimes when you make favorable bets, you still lose them. Even a blue chip could go to zero tomorrow. With Delta Financial, the company didn’t have enough financial strength — that was probably a mistake on my part. I think of it as a favorable starting blackjack hand where unfavorable cards showed up afterward.
SmartMoney: If you could do it over, would you have done the same thing?
Pabrai: It was a good bet.
Poker is all about making bets when you know the odds are in your favor. A player with Aces in Texas Holdem is 4:1 favorite and in PLO (Omaha) Aces edge pre-flop might just be a 3:2 favorite. This basically means even when you play when odds are in favor you are not guaranteed to win. A poker player playing a hand when the odds are in his favor is a good player and not the person who wins the hand. However, it can occur that a good player can lose for a long time because of luck factor.
Ed Thorpe, an investor and former successful blackjack card-counter, writes in his book that the best card-counting method provides a mere 2% edge over the house. Which means you’ll spend a lot of time losing. His road to blackjack success was paved with agony:
I lost steadily, and after four hours I was behind $1,700 and discouraged. Of course, I knew that just as the house can lose in the short run even though it has the advantage in a game, so a card counter can fall behind and this can last for hours or, sometimes, even days. Persisting, I waited for the deck to become favorable just one more time.
Michael Mauboussin – Do not Confuse Outcome and Process
Being result oriented comes easily as we tend to evaluate our decision based on the outcome. This happens frequently in Poker and Investing. Mohnish Pabrai didn’t in the case of Delta financial because he believed his decision making process was fine.
Many Fund Managers with significant exposure to a sector or because they have a sector fund in vogue may end up outperforming despite a failed investment process. This was true for some managers in 2006-08 with significant exposure to Real Estate or Infrastructure companies like Lanco Infratech, DLF, HDIL, Jai Corp. While, in case of investing the bad process can be hidden for years and at times can go unnoticed, in poker one can know for every hand whether the process was right based on odds and not the outcome. If a poker player, adopts consistently bad process he will end up losing in the long run. In case of investing though, the evaluation and judgment of process is not so easy to make.
Losing faith after inevitable losses despite a sound, probabilistic predictions can cause people to quit predicting even when they’re technically good at it. This is true for both poker players and investors. The focus should always be on the Process and Luck can be evened out in the long run.
PS: This blog was triggered after a Professional Poker player losing a big hand immediately said – I played right. He had made the right probabilistic play.
About the Author
I have spent the last 15 years (2004-2019) as a Sell-side Equity Analyst covering sectors like Media, Telecom, and Consumer MidCaps. I was at SBI capital markets from 2004-2007 and at ICICI Securities from 2007-2019.
I was rated by Institutional Investor as the best analyst for Media – India for 2014-16. I am a Recreational Poker player and was the winner of the First ever WPT Indian Main event. I have dabbled a bit in Theatre. I wish I can watch more movies and read more books. Hope to travel around the globe.