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Eric Houssels
Eric Houssels
Articles 

Everything I Ever Needed to Know about Investments I Learned at the Racetrack Part III

November 01, 2007

Series by Eric Houssels of Houssels Capital Management, LLC.

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Lesson #5: Long Live Luck!

In the last lesson, I spoke of the “bad beat” with which gamblers are all too familiar. In racing, horses stumble, get blocked and bumped, draw a bad post, etc…the list of unearned misfortune is endless. The lesson of this undeserved defeat is simple: luck (or its more polite term – randomness; econometricians may prefer the “error term”) exists and will always play its part.

Luck is my horseplayer’s term for that which is truly out of our control. On its face, therefore, there is simply nothing we can do about it. What we can do was addressed by lesson #2 of this series. We can focus like a hawk on our process and discipline. The outcome is simply out of our sphere.

In this same lesson #2, I mentioned one of the great temptations of the racetrack that rears its heads at almost every visit. I call it the 9th race syndrome. Being overly focused on outcome – in this case, our day’s profit and loss account – produces an impulse to “make it all back (and then some)” on those days where we are losing going into the 9th and final race. With “making it all back” replacing making logically derived value wagers as our core objective, we are often led down the path of large, low probability, indefensible-on-the-basis-of-reason wagers. The popular Wall Street adage that more money has been lost chasing yield than in any other endeavor is easily modified at the races to more money has been lost “making it all back” in the 9th than in any other endeavor.

I make mention of this pitiable syndrome in this section about luck, though it does not directly relate, to demonstrate what can happen a couple of steps after we stop accepting luck. We presumably (given, for horseracing, this is a gi-normous presumption but not so in investing) come to the races with an edge produced by a superior process and our steely discipline in sticking with it. If, by the 9th race, our edge has failed to manifest itself with a larger wallet, this does not mean we take up free license to abandon it in favor of wild swings at a lottery-like result. The 9th race is no different than the 6th or the 1st. You will come to the races again; stay rational, follow the process, and shun indulgence in immediate-term, pre-race emotions.

This very same prescription is applicable to investments. A year simply does not matter. A career does. Don’t chase the hoped for satisfaction of annual outperformance at the expense of true, value-adding long-term alpha.

I feel I owe one last word on luck before wrapping up this piece. Early this summer, my brother, myself, and a buddy from Australia had the great fortune to attack the famous seaside links of Scotland and Northern Ireland. Within days of our pilgrimage, it had become quite clear what the difference was between UK linksland golf and US parkland golf – luck. More specifically, links golf simply has more factors – wind, rain, nooks and bumps throughout the terrain, and harder surfaces that require more of a “guess” at the roll than anything else – than US target-like golf does. We had more fun playing these courses of randomness and luck than we could ever have hoped for. We took our turns getting lucky and getting snake-bitten. There were just as many miracle kicks in favor as there were against; luck found its way of evening out. In the end, we learned to respect luck whether it works for or against you; more importantly, accept luck always, as it is here to stay.




Lesson #6: Cherish the Stories

Laura Hillenbrand’s beautiful book and subsequent Academy Award nominated movie, Seabiscuit, has reminded the world what we racetrackers know very deeply: horseracing is filled with the most heartwarming and incredible stories and characters at all levels of the game. When you get involved in horseracing, you are opening a book of fairy tales that you will never come close to finishing in your lifetime.

Lesson #6 is simply to enjoy the lifegiving stories of the races and the game’s wonderful characters (my family’s particular favorite was a fellow by the name of Strap Holloway - a stalwart backstretcher and dreamer who had no issues with commuting by horse between Las Vegas and Los Angeles with his pack of stray dogs; we have had many a good laugh at the dinner table recollecting Strap’s tales).

Investing has its stories, too. Every investment is a story, after all. Lesson #6 instructs us to enjoy investing, our stories, and the stories of our colleagues. We are all so blessed (repeat: so BLESSED) to be living where and when we are and to be engaged in such a fun, stimulating, and ridiculously overpaying endeavor. Tell stories, listen to those of others, and enjoy each other. It is the stories and the people that will lighten our load and keep us grounded.

It is now time that I wrap up the lessons from the racetrack. But, I would be remiss if I did not offer what the races truly mean to me. The races are where I came to know my father. It will forever be our place together, and I will love them as and because I love him. My story continued this past summer when I took my three-year old son, Dane, to the races for the first time. We went to bet on one and only one horse that day, a horse named Las Vegas Lucky. Dane is a natural! Las Vegas Lucky won with ease, and we used our winnings to buy a large stuffed animal from the gift shop whom Dane aptly named Las Vegas Lucky. I framed the race program, along with a photo of an exultant Dane, and I intend to cherish this momento for the rest of my days.

About the author:

Eric Houssels
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.1/5 (9 votes)

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