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• Back in action, on the xB Browser – http://bit.ly/EV6LS
  – all cloaked up! #
• More use of games to teach finance – by the excellent Hoofy and Boo at Minyanville – http://www.minyanland.com/ #
• Beware the investment letter with long winning streaks: (a) they could be false, and (b) it could be just luck as per WSJ – http://onlin … #
• Sorry about that on the last post – the WSJ link is http://bit.ly/3CDa8j – "The Triumph of the Random" #
• Got another comment on my blog – from http://www.thesunglassmanonline.com/ – they're very precious to me so thanks! #
• Starting to work on a list of websites with what seem to be dodgy investment advice based on ridiculous past performance claims #
• Great list of investment books ranked best to worst at SeekingAlpha – http://bit.ly/CRKeF #
• Gold in music rights – and soon Jacko's portfolio is for sale – private equity (KKR) is getting involved – http://bit.ly/7ct26 #

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Nassim Taleb’s best-seller - The Black Swan: The Impact of the Highly Improbable – proposes the Ludic Fallacy as a significant contributor to financial crises that have plagued the modern world.

The Ludic Fallacy states that games are used too often to help people model, learn about and think about real life situations.  Taleb hypothesises that this causes problems because the defined rule sets of games do not take account of the full range of uncertainties that exist in the real world.

However, having read through the relevant section of the book I disagree with many of Taleb’s points, and have found other parts of the book that contradict the Ludic Fallacy.

As you can imagine I have a vested interest in disproving (or exposing the fallacies of) some or all of the Ludic Fallacy since Texas Holdem Investing is based on using the game of Texas Holdem Poker to train people to invest.  However, it is not just a vested interest – it is a passionate belief of mine that games can provide a great environment to learn about the real world.  Clearly there is no substitute for the real world, but using games appropriately and ensuring that they are realistic enough can certainly help.

This article argues about why (Texas Holdem) Poker goes against many of the elements of the Ludic Fallacy, and also explains why we shouldn’t be harsh on games as a way of learning all the time.

Texas Holdem Poker has uncertainty based on the cards that are dealt but also based on the unpredictability of the actions of the players.  This makes the set of potential outcomes infinite even in the context of a 52-card universe, unlike games against the house e.g. roulette, which Taleb often refers to in his discussions of the Ludic Fallacy.  Therefore, Texas Holdem Investing will help the learning investor to become familiar with the infinite randomness of the financial markets.

The training regime of the military is totally based around the ludic concept – they even go so far as to name many training exercises “wargames”!  And Taleb actually uses the Black Swan book to praise the military thinkers who he encounters at one point as being far more capable than some of the other strategic and financial planners he meets.  Clearly the military don’t believe in the Ludic Fallacy – otherwise they never would have set up the Top Gun school in Fightertown, California.

Another example of the military using a “gaming” environment for training is the US Special Forces camp at Fort Bragg which uses extreme methods to help soldiers gain some insight to the terrifying experience of being captured.  I have written about this in more detail on the post entitled “Investing and Poker Lessons in Survival – Can we all be like Jack Bauer, James Bond, Phil Hellmuth, or Warren Buffett?“.  In this “game” special forces trainees are subjected to extreme stress as part of a live battle and kidnap simulation.  Clearly it is not the real thing, but I’m pretty sure that going through this kind of “game” helps prepare the soldiers in some way for the stress of the battlefield.

And what about one of the most well known “game training” systems of them all – the flight simulator.  Thousands of pilots are trained how to fly a huge jet with hundreds of passengers through the medium of a computer simulator that (as per Taleb) only has a finite number of possible outcomes.  Yet they end up graduating just fine to fly the real thing with amazing safety records.

And perhaps the most important proof of all that poker doesn’t suffer from the Ludic Fallacy comes from Taleb himself!  Yes in Aaron Brown’s fantastic book – The Poker Face of Wall Street – Taleb provides the foreword and he highly praises poker as benefiting from the Ludic Virtue.  Poker offers true randomness according to Taleb due to the infinite levels of “social probability” caused by the actions of other players (see above).  And he finishes off the foreword with the phrase “Economic life is gambling”.  My own derivative would be “Investing is gambling, just like Texas Holdem Poker”.

So, after all that, Taleb admits that poker doesn’t suffer from the Ludic Fallacy, and I think that I’ve given some good reasons as to why “games” can provide good training even for extreme situations in other walks of life.  And let’s face it, investing can be pretty extreme at times.

Marketers often talk about creating a brand, and that’s what I’m trying to do with Texas Holdem Investing.

“They” (the marketers) say that an important part of developing a brand is to have “hooks” that remind people of your brand.

Well I’ve just found my musical hook – “The Gambler” by Kenny Rogers.

“The Gambler” is one of most legendary country music songs ever written and the album with the same name hit number 32 on About.com’s list of the top 200 most influential country songs ever.

Investors could do well to read and absorb the lyrics of this song – the man speaks the truth!

For some fun and diversion myself amidst all of my “serious” posts, I decided to pen my own version of the lyrics inspired by the mythical figure of “The Trader”, an mysterious and sphinx like character who is the equal of The Gambler.

I hope you like them and might learn from them.

And perhaps some day I’ll do my own karaoke version for YouTube – wearing a purple jacket just like Kenny!

The Trader – By The Masked Financier – May 2009

On a hot summers evenin on a steakhouse down near Wall Street,

I met up with the trader; we were both too wired to sleep.

So we took turns a starin at the quotes on the Bloomberg

Til boredom overtook us, and he began to speak.

He said, son, I’ve made a life out of readin annual statements,

And knowin what the profits were by the way the CEO’s talk.

So if you don’t mind my sayin, I can see you’re out of aces.

For tastin some your Lynch Bage Ill give you some advice.

So I handed him my bottle and he poured himself a half glass.

Then he took out a Cohiba and asked me for a light.

And the room went deathly quiet, and his face lost all expression.

Said, if youre gonna play the game, boy, ya gotta learn to play it right.

You got to know when to hold em, know when to fold em,

Know when to walk away and know when to run.

You never count your money when youre sittin at the Bloomy.

Therell be time enough for countin when the stock exchange is closed.

Now evry trader knows that the secret to survivin

Is knowin when to cut a trade and knowin when to stay.

Cause evry trade’s a winner and evry trade’s a loser,

And the best that you should aim for is 10-15 a year.

So when he’d finished speakin, he turned back towards the Bloomy,

Crushed out his Cohiba and zoned into the flow.

And somewhere in the darkness the trader, he broke even.

But in his final words I found an ace that I could keep.

You got to know when to hold em, know when to fold em,

Know when to walk away and know when to run.

You never count your money when youre sittin at the Bloomy.

There’ll be time enough for countin when the stock exchange is closed.

You got to know when to hold em, know when to fold em,

Know when to walk away and know when to run.

You never count your money when youre sittin at the Bloomy.

There’ll be time enough for countin when the stock exchange is closed.

The Financial Times describes in “Recruits fired up by virtual rivalry“ how some of the largest companies in the world are using online games to attract recruits and also train employees.  These games are part of the trend of “experiential learning” which education experts promote as improving the quality of college and business education.  I see learning through playing as a form of helping people to learn by “doing” as opposed to just learning by “reading”, as discussed by Zen Habits in “Stop Reading About It and Do It“.

Amongst the examples given is BNP Paribas’ Ace Manager, which includes game sections for asset management and investment banking based around a virtual tennis industry.  BNP Paribas has spent more than $1 million on the game which is purely meant to develop the bank’s brand.  For internal employees BNP Paribas has developed Starbank which is a game that helps new employees understand the business better.

Airbus have developed a game that will promote their brand amongst college students whereby the players will help Airbus to come up with new innovations for their aircraft development programs.

Apparently IBM is the grandpa of using games in the corporate environment, and Innov8 helps students develop the skills necessary to work well in the services industry, since a large part of IBM’s business is now services such as consultancy rather than computing products.

One of the directors at Learning Dynamics, a leading developer of training games for corporations, talks about how these games are multi-media experiences that immerse the player in a “realistic” situation where they player can learn in a “risk free environment”.

However, for investors Texas Holdem Investing takes game-based training to one level further.  Rather than learning skills in a “risk free environment”, players learn to invest by putting their own money at risk.  Because learning to invest in a “risk free environment” is about as useful as learning drills in the army with wooden guns.  Risk is an integral part of investing – and Texas Holdem Investing teaches players about risk in the most direct way possible.

You will recall my earlier post about Warren Buffett’s terrible investment in ConocoPhillips where we noted that “Warren Buffett Holds When He Should Fold”.

In it I described how Buffett continued to hold onto his ConocoPhillips investment and managed to check through all the way to the river (fortunately he didn’t up his initial stake!) even though the “5 board cards” he was dealt – the oil price falling from $140 to $40 – were absolutely terrible compared to what his starting hand had needed from the flop, turn, and river.

When the investing community sees this kind of decision from Buffett (without Charlie Munger’s input) there seems to be a need to try to explain how the Sage of Omaha could stay in such a trade.

I found one way of answering this question when reading the latest post from the excellent “Jeff Matthews Is Not Making This Up” blog.  The post is entitled “What They Want to Know: Our Top Ten List for Warren Buffett”.  Jeff has stated that his objective for this year’s Berkshire Hathaway AGM is to provide Warren and Charlie with some searching questions that are directly related to Berkshire’s businesses.  Therefore, Jeff asked his blog readers to send in suggested questions and he has selected 10 questions which will be put to the board at the Berkshire AGM.  I’m sure that these 10 questions won’t be the only difficult questions that Buffett and Munger have to answer given the performance of Berkshire Hathaway as described in “Berkshire’s 31% Decline Spurred by Derivatives Buffett Derided” at Bloomberg today.

The key questions that relate to Buffett’s infinite Investment Flop referred to in the title of this post are:

• #3 Washington Post went from being a local paper to a national paper to a learning company. Wells Fargo went from being a conservative bank to a highly leveraged mortgage lender. Moody’s went from being a boring ratings agency to a co-conspirator in the mortgage bubble. How do you justify holding stocks “forever” when the original investment eventually becomes unrecognizable in most cases?
• #7 What factors, if any, would cause you to change your favorite holding period from “forever” to “sometime in the future” when thinking about the challenges your businesses face?

The “forever” holding period just doesn’t fit with the Texas Holdem Investing method.  Every investment decision should have some sort of limit based on time or performance.  And granted that you can change this limit as the investment progresses, but you shouldn’t set forever as your limit.  Business history shows that very few companies can last for even 10 years, let alone forever.

And, as a round off to this post, I see that Jeff and his crew will also be asking Warren about his ConocoPhillips decision.

• #8 On Conoco, it seems Berkshire made the uncharacteristic move of buying an asset with a price chart that went straight up, rather straight down. Please explain the decision making process on Conoco and what you learned from this admitted mistake.

Maybe I should submit a Texas Holdem Investing question myself?

Investing is hard.  Elite investing (i.e. being part of the 2-3% of investors who make super-normal returns) requires immense emotional control and a supreme ability to deal with the stress of the rollercoaster of the markets.  And not everyone can achieve that elite level of investing skill.
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Todd Harrison of Minyanville recently posted up his 10 Commandments of Trading on the MarketWatch website.  Todd once worked with the famous (or infamous depending on how you think) Jim Cramer managing the Cramer Berkowitz hedge fund.  It’s an interesting list with associated analysis by Todd and you can view it at “The 10 Trading [...]

Over the past few weeks I have noticed that there have been blog posts about:

Fun and personal finance
Fun and investing

Get Rich Slowly asked its readers “Where’s the Fun in Personal Finance”?  Amazingly, JD Roth, the author of the site gets a kick out of things like increasing income and developing methods for paying down debt [...]

There is a fascinating article in Forbes this weak about Andy Beal and his eponymous Beak Bank in Texas – “The Banker Who Said No” (Huffington Post describes it as “Andy Beal Said No During The Boom, And Is Reaping Profits During The Bust”). And much of the article and Andy Beal’s background is [...]

As the readers of my blog will know I have been gradually posting my book about Texas Holdem Investing onto the site. I am currently at the the start of Step 5. However, I’ve decided to provide a preview of all 14 Steps of Texas Holdem Investing. I’ll get there eventually!
Step 1. [...]