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I have always been very attracted to games. In most cases, they are stochastic simulations. A game could be understood as a pre-designed system in which the objective is to beat the other player. Around this large and almost ethereal goal, a set of variables is created to conform the universe of paths one can take. They are idiosyncratic to each game and are what make them unique. Furthermore, the more variables included, the more complex will the system be, with life, macroeconomics, physics, at the pinnacle of complexity.
Complex things, for whatever reason, have always captivated my eye, and the realization that a game is nothing more than a complex system with, in many cases, room for randomness and unpredictability, is fascinating.
With the above definitions, parallelisms between investing and games flooded my mind. However, there are huge differences as well. The clearest among them is that investing is not a zero-sum game. We now live in a world where most wealth is intangible. Valuations, isolated, could demonstrate the liquid value of companies, but, if we were to liquidate all companies at the same time, there would not be enough cash for everyone. As of 2022, there were over 5.8tn dollars in circulation, but the S&P 500 market cap is north of 30tn.
It sounds like a terrible thing, but this also has its beneficial counterpart. Value can be created out of thin air and wealth follows. I stop on this particular point because investing and getting rich is seen as morally incorrect by many people. The latter do not understand that people do not necessarily get rich by making someone poor. Therefore, there should not be any remorse nor associated negative feeling with doing well in things like the stock market.
Humans become masters at what they practice repeatedly. Our brain is constructed in a way that can detect patterns in activities and scenarios we see ourselves involved in, so that the next time we engage with the task, it becomes easier. I’m not really sure if this is biological, psychological or what, I should do more research on the matter.
Nevertheless, it is true. In games, you can become better by exposing yourself to simulated matches. The more you play, the more you read about it, the more you watch other people play it and the more you think about it, the better you will become. Perhaps the conclusion is straightforward, but I did not find the reasoning in that line as well.
You begin to learn a game by knowing its goal and identifying the variables. Our brain does not have the computing power required to immediately come up with all possible confection of future scenarios, because that’s what everything is. There’s a goal, there are variables, and the only thing that changes is how variables are arranged to conform scenarios, with each disposition changing the scenario being played out.
In response to our stupidity, practice and repetition are needed. In investing, that means not only time and experience, but reading, listening to great investors, continuously researching and thinking about the subject. All of these shed some light on the dark path we start at. In the stock market, a pursuable goal can be outperformance and the variables that play a role here are infinite.
We see the end of the tunnel and we think or imagine what we can encounter midway. However, everything is darkness when we start, even if we correctly identified variables and can visualize the objective. Preparation is like turning on different light bulbs along the path so that we can walk through it and reach the goal.
In many games, two teams face one another. The curious thing is that, for fairness to have its place, the larger your team, the larger the enemy team will be as well. This does not stand for investing. We have an unfair advantage with respect to players in other fields. Investors can team up with others for both of them to learn and improve.
I’m not talking about a decision-making team, I believe my opinion on that front is kind of clear. Not everyone will necessarily make us improve and, the more opinions we consider, the more will our decisions tend towards average. And average in investing is not good. What I’m discussing here is intellectual allies. Multiple great investors have done interviews and written books. People that have already walked the path we are walking have shared how they did it and I believe it’s stupid for us to not leverage such amazing resources.
The article was initially called ‘Poker and Chess’. I found a lot of curious insights that arise from both games (more known the ones from poker), but I started writing and noticed the broad subject is absurdly interesting and that I had much more to write than I thought. I’ll be covering poker and chess in a future article, perhaps even next one.
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