If you ever wanted to see the stock market come to a screeching halt, then all’s you need to do is break out the playing cards. Many of the biggest investors are also devoted to playing bridge. They are so devoted that it’s not always clear what they find most important: winning the next trick or picking quality stocks.
The former Bear Stearns CEO, Jimmy Cayne, was also one of the top bridge players prior to ever actually working on Wall Street. He is notoriously famous for being a participant in a multi-day bridge tournament while Bear Stearns was spinning out of control and heading toward bankruptcy.
Warren Buffett did not become an avid bridge player until later on in his life, but at this point he devotes a large portion of his time to playing the game, and he often plays with Microsoft founder Bill Gates as his partner.
Let’s not forget about David Einhorn, hedge fund superstar. He is a tournament bridge player and an occasional participant in the World Series of Poker.
John Hussman, fund manager, provides us with a thought-provoking explanation of why millionaires have a love affair for the card table. He shares an insight from the father of value investing, Ben Graham, who gave a lecture long-ago stating that those looking to beat the market should study the habits of bridge players that emphasize “playing a hand right, rather than on playing it successfully.”
Just like Graham pointed it out, playing your hand the right way – in the stock market or bridge a game – will generally lead to long-term success. But it does not guarantee that you will experience success right away. On occasion, playing a hand the right way will lead you to failure; sometimes picking a stock for all the right reasons can turn into a loss. Playing bridge can teach investors the ultimate importance of sticking to a strategy that is well-thought-out.
The more you think about the point Graham is trying to make, the more it actually reveals. Think closely about it: if there was ever a strategy that ultimately led to healthy stock market gains, all people would use it. The price of the strategic stocks would soar. And because of it, it would mean lower returns and the ability of those stocks to generate good returns would invariably disappear.
In order for a strategy to generate high returns for the long run, it has to fail enough times to scare off those weak at the knees. Only by this happening can it continuously generate enough good profits for the people who remain left standing. A loss today will become the price of future gains. Those gains are specifically slated for those that are willing to stick with a strategy for the long-term.
That’s the overall theory at least, but it holds up in practice. There are many different investing approaches that can generate quality returns over a long period of time – indexing, value investing and momentum trading are three of the big ones. But at one time or another, each one of these investing strategies has failed miserably. In the 1990s, value investors got crushed. In 2000 and 2008, the momentum players were destroyed. Indexers also received the smack down at that time. Even the saintly Warren Buffett has suffered his fair share of losses at certain times. Berkshire Hathaway has lagged the stock market over the last five years.
It is always tempting to switch your strategies up if something isn’t working. But the smart investor – and good bridge players as well – stay with the same strategy regardless of the circumstances. As Hussman also observes, the biggest mistake that you can make in either game is to attempt to win each and every hand. Your focus should be to stick with your strategy, and you will love the long-term results.
Cut the cards already and start dealing, will you?