Horseplayers
I’m a horseplayer, whether I like it or not. I grew up at the racetrack and consider my time spent there to be the single most valuable experience of my education as an investor. Recently, I picked up a book called Horseplayers written by Chicago-land journalist Ted McClelland. It is a delightful read about Ted’s year of professional horseplaying - the lessons he learned and the characters he encountered. I have written before on the site about the wisdoms investors can glean from horseplaying; reading Ted’s book brought several of them to the fore of my mind so I thought I would share. Here goes.
1. Handicapping is easy. Betting is hard.
Talk is cheap in horses and investing. Expressing an opinion bears no (little) cost to its holder and also produces no (none!) profit. It is when one throws himself into the proverbial arena that he learns of what he and his ideas are made. It is not difficult to predict that China is growing nor to excite people about the growth. It is difficult to take action to manifest real profits from this idea. Markets, both investment and horsebetting, are competitive and price accurately far more often than they do not. Putting real money in harm’s way teaches a humility than handicappers, touts, and Wall Street strategists lack. In Las Vegas, our response to overconfident opinion blabber without any dollar backing is simple - “put up or shut up.” I’ve found that the latter is usually the preferred, albeit unnatural, course for the “professional” talker.
2. Never ask how a gambler did at the end of the day but at the end of the year.
It is vital for both the horseplayer and investor to understand what the correct and fair time period for evaluation of his strategy is. And, once understood, he must stick (or amend based on rational, not emotional, consideration) to this period. We gamblers, being human and therefore naturally inclined to seek stimulation and validation, are prone to trick ourselves into evaluating results (especially when they are good) over periods that are too short and do not represent our strategies and processes accurately. This is not to say that should a newly purchased stock significantly rise shortly after a purchase, we should not sell it; that would be foolish, we should sell if it is the rational decision based on our understanding of fundamental value. What I am saying is that we must be very careful to not be screen-sucked into watching the tape and expecting/hoping/seeking stimulation from the daily price movements of our positions, just as the rational horseplayer does not get overjoyed or distraught by any particular race, any particular day, but instead counts himself down at the end of the year to see if the process, when repeated, worked.
3. Luck isn’t your horse winning, it is getting a good price.
Building on what underlies #2 above, horseplaying and gambling are about process. The job is to devise, follow with discipline, and then, based on new learnings, revise a process that produces substantial results over an adequate time period. Seth Klarman, in his latest annual letter, agrees:
“You may find it surprising that when we purchase a bond or a stock we are not directly trying to make money. Rather, we are trying to apply a sound process in order to make a good investment decision, which will then result in our making money.”
4. Horseplaying is not about playing horses, it’s about playing people.
This follows closely along the same thematic line of #3 above. We are not trying to pick the winner when we play a race, we are trying to purchase good value. And how does this come to pass? Simply because our fellow market participants have erred in their judgments of probability. We are competing against their judgments and parting them, when measured over a significant enough time period, from their misguided dollars as they err. Similarly, as there is a Mr. Market for each and every security we own or seek to own, we wait patiently for his bouts of depression to ply his security from him and we return it to him when he succumbs to foolish euphoria: we are playing him ultimately, not simply the fortunes of the business.
5. Winning gamblers don’t look back.
The concept of sunk costs is, theoretically speaking, perfectly sound and indisputable. Yet, even very rational businessmen and investment managers often succumb to being anchored by their previous actions and previous purchase prices. The fact that we paid $36 for one slug of HD (and thought we were getting a good deal) in 2007 means absolutely nothing other than its contribution to our cost basis for tax calculations. We must evaluate our holding based on what we know today and what we believe will occur going forward. In my humbled opinion, the $36 for HD today is fairly full and a decent price to exit. Selling, therefore, is the rational decision, regardless of the lousy three year CAGR produced. In horses, bad beats are everywhere; emotional dwellings on the past distract the winning horseplayer from doing his job going forward. A horse doesn’t know you bet it, just as a stock doesn’t know you own it.
Eric Houssels
Houssels Capital Management, LLC
Eric Houssels is the co-founder and managing member of Houssels Capital Management, LLC, a money management firm based in Las Vegas, NV. The firm focuses on investments in the stocks of publicly-traded companies of all capitalizations that possess, preferably, significant earnings power or, alternatively, assets that can be (re)deployed to achieve significant earnings power and are trading at reasonable valuations. Houssels Capital Management was founded in 2000.
I’m a horseplayer, whether I like it or not. I grew up at the racetrack and consider my time spent there to be the single most valuable experience of my education as an investor. Recently, I picked up a book called Horseplayers written by Chicago-land journalist Ted McClelland. It is a delightful read about Ted’s year of professional horseplaying - the lessons he learned and the characters he encountered. I have written before on the site about the wisdoms investors can glean from horseplaying; reading Ted’s book brought several of them to the fore of my mind so I thought I would share. Here goes.
1. Handicapping is easy. Betting is hard.
Talk is cheap in horses and investing. Expressing an opinion bears no (little) cost to its holder and also produces no (none!) profit. It is when one throws himself into the proverbial arena that he learns of what he and his ideas are made. It is not difficult to predict that China is growing nor to excite people about the growth. It is difficult to take action to manifest real profits from this idea. Markets, both investment and horsebetting, are competitive and price accurately far more often than they do not. Putting real money in harm’s way teaches a humility than handicappers, touts, and Wall Street strategists lack. In Las Vegas, our response to overconfident opinion blabber without any dollar backing is simple - “put up or shut up.” I’ve found that the latter is usually the preferred, albeit unnatural, course for the “professional” talker.
2. Never ask how a gambler did at the end of the day but at the end of the year.
It is vital for both the horseplayer and investor to understand what the correct and fair time period for evaluation of his strategy is. And, once understood, he must stick (or amend based on rational, not emotional, consideration) to this period. We gamblers, being human and therefore naturally inclined to seek stimulation and validation, are prone to trick ourselves into evaluating results (especially when they are good) over periods that are too short and do not represent our strategies and processes accurately. This is not to say that should a newly purchased stock significantly rise shortly after a purchase, we should not sell it; that would be foolish, we should sell if it is the rational decision based on our understanding of fundamental value. What I am saying is that we must be very careful to not be screen-sucked into watching the tape and expecting/hoping/seeking stimulation from the daily price movements of our positions, just as the rational horseplayer does not get overjoyed or distraught by any particular race, any particular day, but instead counts himself down at the end of the year to see if the process, when repeated, worked.
3. Luck isn’t your horse winning, it is getting a good price.
Building on what underlies #2 above, horseplaying and gambling are about process. The job is to devise, follow with discipline, and then, based on new learnings, revise a process that produces substantial results over an adequate time period. Seth Klarman, in his latest annual letter, agrees:
“You may find it surprising that when we purchase a bond or a stock we are not directly trying to make money. Rather, we are trying to apply a sound process in order to make a good investment decision, which will then result in our making money.”
4. Horseplaying is not about playing horses, it’s about playing people.
This follows closely along the same thematic line of #3 above. We are not trying to pick the winner when we play a race, we are trying to purchase good value. And how does this come to pass? Simply because our fellow market participants have erred in their judgments of probability. We are competing against their judgments and parting them, when measured over a significant enough time period, from their misguided dollars as they err. Similarly, as there is a Mr. Market for each and every security we own or seek to own, we wait patiently for his bouts of depression to ply his security from him and we return it to him when he succumbs to foolish euphoria: we are playing him ultimately, not simply the fortunes of the business.
5. Winning gamblers don’t look back.
The concept of sunk costs is, theoretically speaking, perfectly sound and indisputable. Yet, even very rational businessmen and investment managers often succumb to being anchored by their previous actions and previous purchase prices. The fact that we paid $36 for one slug of HD (and thought we were getting a good deal) in 2007 means absolutely nothing other than its contribution to our cost basis for tax calculations. We must evaluate our holding based on what we know today and what we believe will occur going forward. In my humbled opinion, the $36 for HD today is fairly full and a decent price to exit. Selling, therefore, is the rational decision, regardless of the lousy three year CAGR produced. In horses, bad beats are everywhere; emotional dwellings on the past distract the winning horseplayer from doing his job going forward. A horse doesn’t know you bet it, just as a stock doesn’t know you own it.
Eric Houssels
Houssels Capital Management, LLC
Eric Houssels is the co-founder and managing member of Houssels Capital Management, LLC, a money management firm based in Las Vegas, NV. The firm focuses on investments in the stocks of publicly-traded companies of all capitalizations that possess, preferably, significant earnings power or, alternatively, assets that can be (re)deployed to achieve significant earnings power and are trading at reasonable valuations. Houssels Capital Management was founded in 2000.
