I've recently been playing a lot of a game that I really enjoy: no limit Texas Hold-Em. Through the time that I've spent playing over the past few months, I've begun to see and think about poker concepts that apply to both to the real world and the world of investing.
One in particular that I was thinking about this afternoon was patience. When you are playing poker (correctly) you spend close to 95% of the time just sitting and watching. You fold over 80% of your hands before any cards are even dealt on the table. As a player I spend this time watching other players, listening to them talk, and taking note of the number of chips in their stacks.
For most players, trying to sit back and watch hands is excruciating. I sit next to players that haven't played a hand in a little while and I can feel the tension. This of course, is how some players can win consistently - they can capitalize off this impatience.
This same concept applies to the world of investing. I've held close to 90% of my entire portfolio in the same position since late 2005: silver and silver related assets such as mining stocks. Just the idea of doing this is staggering to most people. I spent about 18 months studying the financial markets intently from the beginning of 2004 through the end of 2005 when I stumbled upon silver as an investment.
When I have had free cash available over the years, I put it into the silver market. Not in savings, stocks, bonds, or real estate. For some of the time (mostly at the beginning), I was told I was insane. Then for some of the time people thought I was a genius, and then during major sell-offs (like this most recent one) people generally think I'm an idiot.
I guess I don't think of it that way. I think of it like a game of poker.
For example, last night in one of my last hands I was dealt Ace - King. The flop (the first three cards that are laid out on the table) were 10 - Jack - Queen. This meant I had "flopped the nuts," a term used when you have the best possible hand.
The correct move at this point, based on the fundamentals of poker, is to get as much money as possible into the pot when you have the best hand. That is what I did. I pushed my entire stack in and I was fortunate enough to get a call. The player that called then caught two straight cards of the same suit (known as a "runner-runner" in poker terms) to beat my straight. I lost over 60% of my entire chip stack.
I called a friend of mine who understands the rules of poker on the ride home and discussed the hand with him. He said that because I was "up so much" before the hand started that I should have bet less.
I told him that if I was in that situation, I would have bet almost 100% of my life savings on the hand if I had the opportunity. Based purely on the statistics, it is a far greater investment than silver, gold, any stock, bond, or piece of real estate in the country. At that point I had over 90% odds of winning the hand.
This concept terrifies most people. Investors first response to this idea would be: what about the 10% chance that you could lose. Before I discuss this let me briefly state that I am both young and I do not have children. I plan on both having children and one day being old so I'm sure my view of the world will be different. However, I'm talking to you about how I see the world today.
Every day when you wake up you are starting with X amount of poker chips in your investment account. What people do not understand is that they are sitting in the world's biggest casino every morning on their way to work. The mutual funds that people invest a certain percentage of their savings into every month has money taken out both when you purchase the fund and every year you hold it in there. These are politely called "fund management fees."
What about investing your money in real estate? Let's say you purchase a home for $200,000 and decide to sell it two years later after it has appreciated 2%. You get to the closing table ready to collect your $4,000 (2% of $200,000 in appreciation) and find out that you must pay a real estate agent 6%. Then you must pay closing costs. When you purchase a $200,000 home you are starting that investment close to $8,000 in the hole.
How about putting your money into a savings account earning 0% or putting money into a bond fund that earns 2%? Inflation is currently running over 3% annually so you lose 3% per year through inflation holding your money in the bank (savings account). The bond fund will take out a percentage, same as the stock mutual funds discussed above.
Can you see the parallels to the casino? The house is going to win whether the market goes up, down, or sideways. They are always raking the pot. Every day, month, and year a large percentage of the investment funds are being funneled into the financial market.
What is the goal of every casino? To keep as many players playing as long as possible. What is the goal of the financial markets? The same exact thing.
Back to silver. Silver faces a premium at purchase just like any other asset. In fact, depending on how you purchase it (I purchased and own the bulk of mine through a company called Goldmoney) you will pay an immediate premium for your metal. This premium can run anywhere between 2% to 6%.
This is why I don't trade it. I buy it and hold it. This avoids both taxes and the cost to re-buy. It's why most of the silver I bought between 2005 and 2007 I still hold today.
This is not a recommendation to purchase silver. It is meant to be a thought experiment and a discussion on the financial markets as a whole.
After spending years studying market history, I believe that they move through long term secular cycles, a topic I have discussed and will continue to discuss in great detail here moving forward. Because I believe this concept, I want to build a position in an asset class that is in a secular bull market and then sell when it reaches the mania stage. I do not get discouraged when the price falls during the process. I just take available cash and buy more. Then I buy more.
At some point I will sell all my silver. Based on where I see the markets in the years ahead, I believe a large portion of the money (and a tremendous amount of borrowed money - leverage) will move into real estate, an investment class that will be severely depressed and beginning its next secular upward move.
While my money is in silver today, I spend most of my working hours preparing myself for being a buyer of real estate. I have spent the past few years working on site as a property manager for a 500 unit apartment community. I could think of no better way to learn how to manage a property than being on site at a community actually doing it. I spend my free time reading books on real estate finance, brokerage, attending seminars, and talking to people in the industry.
Most investors have a hard time thinking of investing this way because they need to see action. They want to trade. They pay a brokerage fee for every trade both buying and selling and then they are hit with capital gains on their short term profits. Wall Street (the casino) loves traders. They make a killing off their moves.
This concept moves beyond the world of investing and applies to decisions you make on how you earn your income. Some people look at starting your own company as risky and choose to work at a job. Other people think working as an employee is risky and believe it is safer to own your own company.
Some people think stocks and bonds are the safest investment. Other people think that stocks and bonds are dangerous investments. Some people think holding cash is the safest investment. Others think that holding cash is extremely dangerous due to possible inflation.
Some people think that being diversified is safer because it will minimize your losses. Other think that being diversified is silly if you believe one investment class is stronger than others.
It goes back to the hand of poker that I had. My friend would not have bet his entire stack because there was a chance the other player might draw out on him. I would have put my car keys on the table if I had the opportunity.
People who think that concept is insane (and most do) are the people that go to sleep at night with 100% of their assets invested in US dollar based investments (stocks, bonds, cash, real estate). All it would take would be a minor dislocation in the financial system and the US dollar could enter free fall. This could occur while they are sleeping.
"That's ridiculous," they would say. "The odds of that happening are less than 10% in my lifetime, therefore I am making the right decision by keeping my money in something that will be safe over 90% of the time." They are correct.
Stop and think about that for a moment. Can you see the correlation?
Sorry for the deeper than usual thoughts on a Saturday night. I'll get back to business discussing the sovereign debt crisis and the market events in coming posts. I just like to take some time every now and then to review some of the bigger picture/psychological ways that I view the world.