One of my favourite games in my childhood was Snake and ladder and to date I have always love the game, earlier I loved it because it was easy to play, you can play with as many players as you want and end the game quickly, but after me entering the investing arena the understanding of this game is on a different level. Nowadays I like the game more because of its philosophical and the mathematical link between the game and investing.
Its when I started to read Fooled by randomness by Nassim taleb that I first found out this discovery, Snake and Ladder has no predictable patterns and cannot be learned, however long I have been playing the game I still don't know if the Dice will be a 1 or a 5 or a 6 and I still am not sure if I will go to a Ladder or be bitten by a snake, does this model sound familiar ? Yes, its the Randomness that is similar to what rules most of decisions in the investing world. However I have been investing for the past decade or so I am still unaware when I will be caught by the Cobra (Black Swan event ) just like in the board of Snake and Ladder but the distinction is you can learn patterns in Investing, but not in Snake and ladder which means its more difficult to play Snake and Ladder than invest.
Kind and Wicked world
In the book Range, David Epstein talks of 2 worlds, Kind and Wicked world, the distinction is in a Kind world like Chess where patterns are repeatable over and over, in investing there are no similar repeating patterns everything keeps changing, The bull markets are getting longer and bear markets are getting shorter which was different earlier. In a Wicked world you cannot learn or predict anything, who did predict Covid ? and if they did who did predict the stock market crash after that ? and if they did that correctly I don't know none who predicted the eventual recovery after that.
In a non repeatable world like Investing and Snake and Ladder all you have is the next step to watch out for because you cannot learn anything from History and learning wrong lesson may be Fatal. The game is philosophical to me because of randomness and mathematical because I believe in asymmetrical outcomes.
The Tail game
I was listening to Mohnish Pabrai's recent talk and in that he said, In 90's I Invested a few millions in Amazon at 10$ per share and then exited at 14$ ( Wow, In hindsight looks like a very costly mistake) and he went on to say If I had held on with it it would be worth a few billions today. Most of the stock market windfalls happen that way, there will be a few very big wins and the remaining will just be okay sort of investments. what was more interesting to me is what he said later that If I had held on to that investment it didn't matter if the remaining investments did not perform at all, Now that's something noteworthy If Amazon was a 5% of PF and remaining 95% went to 0 it did not matter because the 1 investment paid off more than what other investments had lost.
These are what we call the "TAIL EVENTS" In a Snake and Ladder context this is like catching a ladder once a while and moving all the way from 10 to 90's and only again to be bitten by a snake or go home. We don't know what will happen in Hindsight, but once a while every investor needs such a Home Run.
Charlie Munger has said that If you remove Berkshire's top 10 investment decisions our record would be pretty mediocre, Charlie has understood the game. Investing is no different from Snake and Ladder, Your top 10 investment decisions or holdings will account for most of the gains.
All the Way up
Most of the events in life are tail driven, a few of the dice you throw will land in a snake and that's when we fall we have to remember that we will get a ladder to climb too. I know an investor whose record would be pretty mediocre except for just 3 investments over all the others he made, he intuitively understands the lesson and plays it safe when there is no huge edge for him.
The most interesting part of the game is you keep playing because you know that you will eventually catch a ladder or a multibagger this is the Variable reinforcement where you are rewarded on a random basis which makes you think that the rewards are very near, this is a problem with investing and in the game or you fall for the gamblers fallacy.
Random events and randomness are what rules the investing game, thus what is in our control is to try to capture a Tail event and make use of it, like a game of snake and ladder its impossible to predict from the previous throw what the next throw will be because patterns change all the time.
A big board of Snake and Ladder
Assume Jim Simmons of renaissance tries to decipher rules of Snake and Ladder and tries to bring out a pattern to bet on Snake and Ladder, Its almost impossible to predict the investing world out there, think of the real world as a very large giant board of Snake and Ladder and people playing in it are from ever corner of the world, a random event somewhere in the globe will affect me at the other corner of the world. In such a big board its impossible to figure out where you are and who is rolling the dice.
All we have in our control is Prepare for a Tail event, Hold cash, Buy companies at attractive valuations and leave the rest soon you will catch a ladder despite a few stings from the snake - The game is about SURVIVAL
Don't Bet
It was in a similar game of dice the Pandava's lost the kingdom due to the betting and were forced in exile for nearly 14 years, So don't gamble. If you don't have an edge don't play.
I truly believe in randomness and to my part I am preparing for it and being blind to randomness and thinking in certainties like you would in a Kind world has high costs to pay for.