How Sure Are You?

May 01, 2019 | Sam Rook


A model for thinking about investing.

I want to take a step away from planning to talk about how you can improve your decision making when it comes to just about anything. I am absolutely stealing the idea from professional poker player Annie Duke and her thought-provoking book, Thinking In Bets.


Investing, no matter how you do it, is about making a decision based on some type of thesis. It can be broadly focused: “Stocks tend to go up over time, so I will buy more stocks”; or it can be narrow in focus: “Elon Musk is the greatest inventor since Thomas Edison, so I will buy shares in Tesla”. The thing about a thesis? It can be right or wrong, and in investing it can often be both, depending on the time frame.


My investing thesis is simple. Stocks tend to go up over time, and companies with good balance sheets and growing businesses tend to lead the rise. I know that my thesis will be wrong some of the time, but over 10 or more years, I will be comfortable in my bet that I will be right more often than not.


Which brings me to the aforementioned Annie Duke. Texas Hold’em Poker at the professional level involves two important skills - the ability to know how good your hand is compared to all the possible hands available, and the ability to read your opponents to give you additional information that is not publicly available. Thinking in bets is how she weighs her hand and its possible outcome. A player with two aces knows they have an advantage at the start. Their chance of winning is higher than all others at that moment in time. As more information becomes available, both from visible cards and opponents’ cues, the odds will change either more or less in your favour. If the dealer shows another ace, your odds have improved. Flop a pair of queens with a seven and suddenly you are less sure. Any opponent with one queen or two sevens now trumps your pair of aces. It is this “weighting” process that intrigues me as an investor. Let me explain.


Do you believe climate change is real? Do you believe it is caused by humans? How you answer these two questions is irrelevant for this exercise. What is relevant is how SURE you are of your answers and how MUCH you would bet on your choice. I mean real, actual money. If you think clean coal is a thing and we should be doing that instead of wind power, how much of your hard-earned savings are you willing to risk to back up your thinking? If you think Tesla is the greatest car ever made, how much would you invest in their stock?


That is the question at the heart of Duke’s Thinking in Bets. She has done that calculation thousands of times in her life because each and every hand you play in poker is that principle in action. How sure are you that your hand is a winner, and how much are you willing to bet on being right? When it comes to your own decisions, like in poker, if you make good decisions with the odds in your favour, you may sometimes get a bad bet but you will win more often than you lose.


Take my above question about climate change. If you believe in climate change as THE major risk to our world, how likely are you to invest in the oil and gas industry? In my experience, not very likely. How sure are you that we will have no more need for oil and gas within a generation? Electric cars are showing massive improvements and are the future of the auto industry, but how is the electricity to charge them going to be produced? How will you heat your home when you live in a country with four seasons? I have just added more information to your decision process. I flopped a pair of queens to make you wonder if you still have the best hand.


Given all of the above information let me then ask the second question. How much are you willing to bet on your answer to the first question? Framing this choice in two steps has a benefit of forcing you to defend your initial decision. It tempers your brain into truly weighing the range of possible outcomes. We are wired to make sudden decisions based on emotion without fully understanding the consequences. Thinking like a poker player forces you to keep evaluating your decision as new details emerge. It reduces the impact of emotions in your decision-making process.


The next time you want to make an investment decision, or any decision really, ask yourself these two questions: “How sure am I that I am correct?” and “How much am I willing to bet on that answer?” If you keep it up, you will find yourself making better decisions and achieving better results. And if you happen to beat your friends at poker a few more times, that’s just icing on the cake.


Sam Rook, Investment Advisor

If you are unsure about your investment decision-making process, let me help you find the answer. Contact me today.