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Today is Thursday, the 12th of October 2023. It is the 285th day of the year, 80 days remain. At Starbucks, Pumpkin Spice lattes are on the menu again, so it must be Autumn in the Northern Hemisphere. They’re pretty good if you ever get the chance to try one.
Today, in 1810, the first Octoberfest was celebrated in Munich in the form of a horse race held in honour of the marriage of the crown prince of Bavaria (who later became King Louis 1) to Princess Therese von Sachsen-Hildburghausen. How and when it developed into an event where copious amounts of beer is consumed is not clear.
Quote of the day
“There are at least two kinds of games: finite and infinite. A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play”
In the book, he distinguishes between finite games, which have rules, boundaries and an ending. When playing these games, the goal is to win. Examples would be board games, sports matches and political elections. Infinite games, on the other hand, have rules that change from time to time and boundaries that are fluid. There is no winner or loser; the goal is to continue playing for as long as possible.
Your relationship with your spouse or other loved ones is an example of an infinite game. Other examples could include the Cold War, Middle Eastern conflict, or evolution.
The winning strategy in finite games differs greatly from playing an infinite game.
In finite games, it pays to engage in risky activity, as the rewards of winning outweigh the downside of losing. And if you happen to lose, you can always play another game. Superior strength, mobility, and shrewd risk-taking are rewarded in finite games. Rassie Erasmus, the Springbok coach, understands this in spades. Rassie is known to take many calculated risks, to the extent that he has been called reckless. Yet, under him, the Springboks won the World Cup in 2019 and are currently ranked a close #2 worldwide.
In infinite games, losing means you drop out of the game altogether, and there is no repeat. It’s all over. The game, therefore, rewards very different strategies. The main strategy is not to lose or to survive, and the ability to adapt to any exogenous changes in rules or boundaries helps one in this regard. The famous mathematician John Kelly* devised a betting strategy to minimise the risk of ruin and ensure long-term profitability as a gambler. Importantly, Kelly’s criterion does not try to maximise winnings, it tries to maximise your longevity at the table.
Here’s a YouTube video explaining the Kelly criterion:
Managing money, or the investment “game” is an infinite game.
In investing, the purpose should generally be to:
- Avoid ruin.
- Obtain a satisfactory periodic return.
- And do so over the longest possible time period, letting compounding work its magic.
What you are not doing is trying to win the “investment sweepstakes” over an arbitrary period of time by generating the highest return possible during that time. No true fiduciary would manage money in such a finite way. The risks are too high; the market throws too many curveballs at you.
Despite this, the investment management industry has successfully curated a finite mindsight amongst the players – i.e. the fund managers and their gatekeepers, thereby creating an illusion of winners and losers. “Winning” the game is a highly marketable asset, and as fund management firms have morphed into marketing-led organisations, this asset allows them to “sell more products” to their customers. They even dish out awards to funds that have “done the best” over some arbitrary period, usually three years.
One of the open-ended funds I manage, the Merchant West Value fund, has been the very fortunate recipient of a few of these awards over the years. Not through any brilliance on my part, but purely through a lucky confluence of a short-term investment burst, which happens occasionally, and the specific period over which the “game” was measured.
What are the tactics of a finite investment game player?
They would include positioning the portfolio strongly in line with a forecast and continuously repositioning it as the forecasts change. It would include buying “hot stocks” which are going up on hype mistaken for fundamental factors, and it would include being highly benchmark cognisant – as the bigger risk in a finite game is not that of losing money, but losing clients due to underperformance of the peer group.
Because winning competitive finite games requires effort, players tend to become focused on the game’s rules to the exclusion, potentially, of the more fundamental values the game should serve. These values would include the following:
- Not asking “What do I need to do?” but rather “What must I avoid?”
- Cause-effect relationships don’t always work out the way you think they will.
- Markets are subject to vicious randomness.
- Assume your assumptions can be wrong and plan with a margin of safety.
- Never place yourself in a position where you are forced by circumstance to do something you don’t want to do, even if that means ridicule in the short term.
The siren call of “winning” the finite game – from the sales team, the management of the business, and yes, even the gatekeepers, is very hard to resist. It is a game I tried to play for a long time. Playing this type of game ultimately led to a poor long-term track record, albeit interspersed with the odd gong for a podium place.
I opted out of this “game” just over three years ago. The mindset I now employ in the open-ended fund I manage for Merchant West is that of an infinite investment game player. This means a fully diversified portfolio, with no “swing for the fences ” type exposures, minimal trading – i.e. a long-term mindset, and a complete disregard for short-term investment outcomes, especially those relative to an index. Not because I don’t care, but because these outcomes are arbitrary and capricious.
Even the nickname of the fund – the cockroach – is not designed to be an attractive marketing proposition, although it does imply a certain robustness to different possible future outcomes, many of which could be adverse.
* As an aside, Kelly was a chain smoker who died at 41. As always, if someone is an expert in one domain, it does not automatically follow that they are an expert in another.