There is a fascinating article in Forbes 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 of great relevance to the concept of Texas Holdem Investing.
First, Andy Beal’s background. Beal is steeped in the lore of poker. In a most un-bankerlike move Beal entered the Bellagio in Las Vegas in 2001 and set up a challenge game with the world’s best poker players where the pots were $2 million – at that time some of the highest stakes ever. Wearing over-sized sunglasses and listening to music on earphones Beal managed to acquit himself well against the titans of the poker world. On one day he won $11 million, but he confesses to ultimately having lost more than he won. There was a book written about the whole event called “The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time”
But it is Beal’s legendary yet low-key behaviour in the investing and banking world over the last 4 years that has demonstrated his tremendous ability to sit out one of the longest possible runs of bad “investing starting hands”.
Beal Bank invests in loans, and enjoyed a great deal of success up to 2004 by playing his investing hands very astutely. But when the market for loans started to go to the moon after 2004, Andy Beal felt like he was starting to get dealt lots of bad starting hands that he couldn’t play with. While Beal waited this out the majority of the investing world continued to play at the table with IOUs instead of real chips where the IOUs were being written by players that didn’t have the money to back them up (kind of like AIG).
Waiting out this boom was very painful for Beal, like it is for any poker player who is dealt a long string of bad pocket cards. Yet Beal still had to pay his investment “rake” which was the costs of keeping his operation running. The best he could to do reduce his rake was to downsize his operation which was very painful and difficult but he pushed it through. He tried to find ways to distract himself from the temptation to start playing – he came into work for less hours, played backgammon, and had lots of long lunches.
And then lo and behold, the card game collapsed starting in late 2007. Suddenly people who had lots of dud IOUs instead of chips realised that IOUs were worth a lot less than their face value. And so from Andy Beal’s perspective the starting hands he was being dealt started to improve, and then actually became awesome. Not only were the cards good, but the other players who were left were still used to the old style of playing fast and loose and they couldn’t compete with Andy Beal and his bank. And Beal Bank buried the other players. The poker player who lost a little in Vegas cleaned up with Wall Street.
Felix Salmon also has an interesting perspective on his Seeking Alpha blog – “Andy Beal Shows How Bankers Should Gamble” – where he notes that like Warren Buffett, Beal has acquired the ability to make great investments by zigging when others are zagging (although no-one is perfect – even Warren Buffett). Salmon notes that when Beal wanted to gamble, he simply went to Vegas and had a blow out. Now it wasn’t your typical blow out of some slots and some limit Texas Holdem Poker. But he did get the gamble out of his system. Unfortunately, the Wall Streeters had their gambling blow outs on the job. Maybe we need to set up some more high stakes poker games in financial services districts around the world for training purposes? Now there’s an idea!
So, when you get through Texas Holdem Investing, you need to be (just like Andy Beal):
1. The Texas Holdem Poker player who says no (to bad starting hands!); and
2. The Investor who says no (to bad investing opportunities)
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Really you just have to be smart about it. If you’re going to gamble, in whatever arena of life or business, you gotta know when to say no.