A grinder not a gambler

Parallels in poker

I’m a collector of companies that match two templates: Nifty and Thrifty (see this recent post for an explanation of the difference). Not all of these companies are good investments but because of their characteristics, the odds are tilted slightly in their favour. They’re low risk, and contrary to conventional theories, low risks means high rewards, relative to the market.

I don’t deviate from statistical measures of valuation much. Whether the company is Thrifty, or Nifty I want to add viable, financially sound businesses at low prices to the Thrifty 30 portfolio. I’m unlikely to pay more than ten times my estimation of a typical year’s profits.

Why pay the same ratio of profits for a company that has been doing well, a Nifty company, as a company that has been doing badly, a Thrifty one? Because I think the potential of recovering companies as a group is as high, or higher, than the potential for steadily growing ones.

This is unimaginative. You can see the frustration in the comments of readers of this blog sometimes, expressed, of course, in a civilised way. I rely so heavily on statistics it’s like painting by numbers, and I rarely have the courage, or hubris, or genius, to weigh up the arguments for investing in a company and pay more for it than my, pretty arbitrary, benchmarks allow.

Even if it looks like a truly great company, in a rapidly growing industry.

Earlier in the week, I watched Rounders on iPlayer (it’s still available tonight!). Matt Damon plays a hustler, a young poker player who loses everything on an all in bet against an older, more clinical player. He’s crushed, gives up playing for years and trains to be a lawyer. He could have been a contender…

An old friend, Edward Norton takes a beating because he owes money he has no chance of repaying. To stop his friend being killed, Damon vouches for him, so the debt becomes his and, with a day to find the cash, he’s inevitably drawn back to the poker table. He returns to the club where the story began and challenges John Malkovich, a Russian with a taste for Oreos, and the man he lost everything to.

It’s a Rocky-like finish. Damon takes all the punches, checking, checking, checking on every bet. He’s down, but he’s not out, grinding out the game into the night. There is eventually, a ‘monster hand’ because this is a film, and it must have a big finish, but the impression given generally is the people who make money at poker, the rounders, grind out their winnings.

If the film is an accurate portrayal of poker, and poker is analogous to investing, I’m a rounder, also known as a grinder. The opposite, according to one poker glossary, is a ‘gambler’.