Arcade Fire

Are You Feeling Lucky?

Imagine rolling into Vegas, sitting down at a poker table, putting on your best poker face, laying down your chips and telling the dealer to "put it all on black." What?

Or imagine walking onto a pickleball court and pulling out a baseball bat(!?). Or imagine firing up Roblox and just stealing everyone's car.

Different games have different rules, different tools and different players. Knowing what game you're playing is table stakes. For games like poker, pickleball or Roblox, the game is obvious, the rules, tools and players are known. Games in financial market, though, are hidden.

RULES OF THE GAME

A share of Apple that I own looks exactly like a share of Apple that you may own. That sameness shrouds whatever games we might be playing, which could be completely different.

Writer Morgan Housel says "A big problem in investing is that we treat it like it's math, where 2+2=4 for me and you and everyone - there's one right answer. But I think it's actually something closer to sports, where equally smart and talented people do things completely differently depending on what game they're playing."

Since they're not labelled or even acknowledged most of the time, most investors don’t think much about their game. A loose way to frame the games investors play is through time. Figure 1 illustrates LCM's highly scientific framework. Investment firm Eagle Point Capital uses a similar time-based lens here.

The Feelings Game

Over the shortest timeframe - hour to hour, day to day, investors play the feelings game. My five-year-old can tell you it's probably not a great idea to put your feelings in charge of your investments. When you watch CNBC or Fox Business, this is the game they're playing and the game they’re trying to get you to play. They want you to feel entertained (and buy products from their advertisers).

When you open up the Robinhood app on your phone and its indistinguishable from a slot machine and you start trading MEmE StONkS, this is the game you're playing. This is a very crowded, very noisy, very chaotic game. It can be fun. It's also, I think, not the most reliable way to get to your long-term goals.

The Earnings Game

Moving a bit further out, research analysts mostly play the earnings game. This game is a bit more orderly. Banks play this game. They publish well-crafted notes from savvy industry experts that say "such and such company will earn so much per share," and influence market expectations and prices that way. Sometimes this game is useful; it's still crowded.

The Ivory Tower Game

Moving out again, you're now in more open space. You're looking at things several years into the future. This game is moved by industries and cycles. Most analysts and investors will have changed jobs at least once in this timeframe - so many find it distracting to spend too much time thinking about it. The crowd here is thinning.

The Long Game

Moving into the farthest block of time on our line - five or seven-ish years or longer - things really thin out.

This is the space Jeff Bezos loved when building Amazon. "If everything you do needs to work on a three-year time horizon, then you're competing against a lot of people. But if you're willing to invest on a seven-year time horizon, you're now competing against a fraction of those people… Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue."

The aspects that matter here are return on capital - this is the magic of compounding that Buffet is always going on about in his letters pretty much every year, people and culture. Do they deliver the things that they promise to deliver? How do they respond to adversity? Do they learn and adapt? Because, over this timeframe, something will go wrong.

As the crowds and competition thin across the timeline, the odds for better returns tilt in favor of a patient investor.

This long game is where LCM likes to spend its time. Playing games without much competition. There are no points for degree of difficulty and if we can improve our odds of success by simply by playing the right game and being patient, that's an appealing strategy.

Choose Your Own Adventure

When you walk into the investment arcade, all the machines are the same. All the players look the same. But what game you end up playing is up to you. Many investors never pick a game. They bounce around from one game to another and are often disappointed with the results.

Make a choice.

Choose what game your playing, know what rules you’re playing by, know what it might cost you, know who your playing with and against and stick with it.