If you want to bring the stock market to a screeching halt, break out the playing cards. So many important investors are devoted bridge players that it’s not always clear what’s more important to them: picking stocks or winning the next trick.
Jimmy Cayne, the former CEO of Bear Stearns, was a top bridge player before he started work on Wall Street. He’s famous—maybe notorious is a better word—for participating in a multiday tournament as his company was spinning into bankruptcy. Warren Buffett didn’t start playing until later in life, but now devotes serious time to the game, often with Bill Gates as a partner. And then there’s David Einhorn, the hedge fund star, who is a tournament bridge player as well as an occasional participant in the World Series of Poker.
What’s behind this odd conjunction of cards and capitalism? It’s not just the intellectual challenge of the game. Chess is an equally demanding pursuit, but Wall Street isn’t jammed with grandmasters the way it is with bridge experts.
A fascinating explanation for millionaires’ love affair with the card table comes from fund manager John Hussman. He cites a remark from Ben Graham, the intellectual father of value investing, who, in a long-ago lecture, suggested would-be market beaters study the habits of bridge players who put the emphasis on “playing a hand right, rather than on playing it successfully.”
As Graham pointed out, playing your hand right—in bridge or in the stock market—generally leads to success in the long term. It doesn’t, however, guarantee you success right now. Sometimes, playing a hand the right way leads to failure; sometimes picking a stock for the right reasons results in a loss. Bridge can teach an investor the importance of sticking to a well-thought-out strategy.
The more you ponder Graham’s point, the more revealing it becomes. Think about it: If there were a strategy that invariably led to healthy gains in the stock market, everyone would use it. Prices would soar for the strategic stocks. Higher prices would mean lower returns, and soon the ability of those stocks to generate good returns would disappear.
To generate high returns over the long haul, a strategy has to flop often enough to scare off the weak-kneed. Only by doing so can it generate good profits for those who are left. Today’s loss becomes the price of future gains. And those gains are reserved for people who can stick with a strategy.
That’s the theory—and practice bears it out. There are lots of approaches that can generate good returns over time—value investing, momentum riding and indexing, to name three—but all have failed miserably at one time or another. Value investors got schooled in the 1990s. Momentum players got shellacked in 2000 and 2008, when indexers were smacked, as well. Even Saint Warren, patron saint of the Church of Buffett, has suffered his earthly torments. Over the past five years, his flagship, Berkshire Hathaway, has lagged the broad stock market.
It’s always tempting to switch strategies when something isn’t working. Smart investors—and good bridge players—don’t. As Hussman observes, the worst mistake you can make in either game is to try and win every hand. Focus on sticking with your strategy, and your long-term results will be just fine. Now cut the cards and deal.
Interview with Larry Sarbit
U.S. stock markets have climbed sharply this year. We asked Sarbit, manager of the $1-million IA Clarington Sarbit U.S. Equity Fund, if there are any bargains left.
Your fund is now about 40% cash. Are U.S. stocks getting too expensive?
In 2010, I was more fully invested. Now, it is getting tougher. But I see cash as a very powerful asset to use. Also, you don’t make money by overpaying. The most recent bargain was Sirius XM Radio. I continue to add to stocks I own, like Berkshire Hathaway, Iconix Brand Group and DirecTV Group.
Why are Berkshire Hathaway B shares still compelling?
Warren Buffett has assembled 70-odd extraordinary companies that generate excess cash, have sustainable competitive advantages, and are growing businesses run by good people. Berkshire is trading at about 1.4 times book value per share, which is cheap for a company generating over $1 billion (U.S.) in free cash flow a month. Leave it alone for 10 years and you’ll outperform the S&P 500.
Your new Sarbit Activist Opportunities fund focuses on companies targeted by activist investors. Don’t those stocks get pricey quickly?
These companies are cheap because they haven’t been managed as well as they should have been. Activist investors are bargain hunters, but then they take it to the next level to drive change. We own Microsoft and CommonWealth REIT, both companies where activists are pushing for change.