Central Bankers And The NASDAQ Bubble: Rounders by Ben Hunt, Salient Partners
|Mike McDermott: In “Confessions of a Winning Poker Player,” Jack King said, “Few players recall big pots they have won, strange as it seems, but every player can remember with remarkable accuracy the outstanding tough beats of his career.” It seems true to me, cause walking in here, I can hardly remember how I built my bankroll, but I can’t stop thinking of how I lost it.
– “Rounders” (1998)
|I know it’s crooked, but it’s the only game in town.
– Canada Bill Jones (c. 1840 – 1880), described as “the greatest three-card monte sharp to ever work the boats”, on being told by his partner George Devol that a Faro game in Cairo, Illinois was rigged.
|David Howard:||We’re up!|
|Linda Howard:||We’re still down.|
|David Howard:||How down?|
|David Howard:||How down is she?|
|Desert Inn Casino Manager:||Down.|
|Desert Inn Casino Manager:||You’re a nice guy. You make me laugh. But our policy is: we can’t give your money back.|
– “Lost in America” (1985)
|Boredom is the conviction that you can’t change … the shriek of unused capacities.
– Saul Bellow, “The Adventures of Augie March” (1953)
|Anything becomes interesting if you look at it long enough.
– Gustave Flaubert (1821 – 1880)
|She wanted to die, but she also wanted to live in Paris.
– Gustave Flaubert (1821 – 1880)
To me, at least in retrospect, the really interesting question is why dullness proves to be such a powerful impediment to attention. Why we recoil from the dull…surely something must lie behind not just Muzak in dull or tedious places but now also actual TV in waiting rooms, supermarkets’ checkouts, airport gates, SUVs’ backseats. Walkman, iPods, BlackBerries, cell phones that attach to your head. This terror of silence with nothing diverting to do. I can’t think anyone really believes that today’s so-called ‘information society’ is just about information. Everyone knows it’s about something else, way down.
– David Foster Wallace, “The Pale King” (2011)
|Carl:||This is crazy. I finally meet my childhood hero and he’s trying to kill us. What a joke.|
|Dug:||Hey, I know a joke! A squirrel walks up to a tree and says, “I forgot to store acorns for the winter and now I am dead.” Ha! It is funny because the squirrel gets dead.|
– “Up” (2009)
I’m a good poker player. I know that everyone says that about themselves, so you’ll just have to take my word for it. I’m also a good stock picker, which again is something that everyone says about themselves. At least on this point I’ve got a track record from a prior life to make the case. But I don’t consider myself to be a great poker player or a great stock picker. Why not? Because I get bored with the interminable and rigorous discipline that being a great poker player or a great stock picker requires. And I bet you do, too.
To be clear, it’s not the actual work of poker playing or stock picking that I find boring. I could happily spend every waking moment turning over a new set of cards or researching a new company. And it’s certainly not boring to make a bet, either on a hand or a stock. What’s boring is NOT making a bet on a hand or a stock. What’s boring is folding hand after hand or passing on stock after stock because you know it’s the right thing to do. The investment process that makes a great poker player or a great stock picker isn’t the research or the analysis, even though that’s what gets a lot of the attention. Nor is it the willingness to make a big bet when you believe the table or the market or the world has given you a rare combination of edge and odds, even though that’s what gets even more of the attention. No, what makes for greatness as a stock picker is the discipline to act appropriately on whatever the market is giving you, particularly when you’re being dealt one low conviction hand after another. The hardest thing in the world for talented people is to ignore our mental “shriek of unused capacities”, to use Saul Bellow’s phrase, and to avoid turning a low edge and odds opportunity into an unreasonably high conviction bet simply because we want it so badly and have analyzed the situation so smartly. In both poker and investing, we brutally overestimate the edge and odds associated with merely ordinary opportunities once we’ve been forced by circumstances to sit on our hands for a while.
As David Foster Wallace puts it so well, “the really interesting question is why dullness proves to be such a powerful impediment to attention.” Why do we increasingly suffer from a “terror of silence” where we use electronic information devices to fill the void? Why are most of you reading this note with at least one TV screen showing CNBC or Bloomberg within easy viewing distance? How many of us are bored to tears with the Fed’s Hamlet act on raising rates, and yet have been staring at this debate for so long that we have convinced ourselves that we have a meaningful view on what will transpire, even though it’s a decision where we have zero investing edge and unknowable risk/reward odds. I’m raising my hand as I re-read this sentence.
The biggest challenge of our investing lives is not finding ways to process more information, or even finding ways to process information more effectively. Our biggest challenge is finding the courage to focus on what matters, to admit that more or quicker information will not help our investment decisions, to recognize that our investment discipline suffers mightily at the hands of the impediment of dullness. Because let’s be honest… the Golden Age of the Central Banker is a really, really dull time for a stock-picking investor. I’m not saying that the markets themselves are dull or that market price action is boring. On the contrary, this joint is jumping. I’m saying that stock pickers are being dealt one dull, low conviction hand after another by global Central Banks, even though they’re forced to sit inside a glitzy casino with lots of lights and sounds and exciting gambling action happening all around them. We have little edge in a Reg-FD public market. We have at best unknowable odds and at worst a negatively skewed risk/reward asymmetry in a market where policy shocks abound. And yet we find ways to convince ourselves that we have both edge and odds, making the same concentrated equity bets we made back in happier times when idiosyncratic company fundamentals and catalysts were actually attached to a company’s stock price. Builders build. Drillers drill. Stock pickers pick stocks. We can’t help ourselves, even if the deck is stacked against us here in the only game in town.
Investment discipline suffers under the weight of dullness and low conviction in at least four distinct ways here in the Golden Age of the Central Banker.
First, just as there’s a winner on every poker hand that you sit out, there’s a winner every