What does a “royal flush” in poker teach you about good investing? [Wednesday: The Independent Investor]
Miles Everson’s The Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Happy midweek and welcome to today’s “The Independent Investor!”
We’re excited to share with you our topic for today.
Every Wednesday, we publish articles about basic investing tips, strategies, insights, and advice. Our goal is to help you strategically think about your financial decision-making and achieve true wealth in the long run.
Today, let’s talk about an important event in the history of the U.S. and how it can help you become a wiser investor.
Keep reading below to know why you should be wary of a promised “royal flush.”
The Independent Investor
Are you familiar with the term, “royal flush?”
In poker, a royal flush means a set of cards that are all of the same suit (such as diamonds) and are the most valuable cards (ace, king, queen, jack, and 10) in that suit.
This flush is known as the “unbeatable hand” in poker.
Did you know that during the Vietnam War in 1969, the U.S. used poker-like tactics to put an end to the conflict?
Here’s how the battle played out…
Photo from BBC
By 1969, the U.S. had been involved in the Vietnam war for nearly a decade and a half. The war was already costly, bloody, and vastly unpopular. So, when former U.S. President Richard Nixon took office that year, he wanted an off-ramp.
Nixon knew he couldn’t pull troops out while the war was still raging. However, there didn’t seem to be any end in sight for the battle. So, the next thing Nixon did?
He chose the opposite path and dramatically escalated the fighting!
Under Operation Giant Lance, which launched in October 1969, the U.S. deployed 18 B-52 bomber jets to patrol the polar ice caps. Each jet was armed with nuclear weapons.
While the public didn’t know about the launch, the Soviets – a key ally for Vietnam – easily saw what was going on.
… or so they thought.
What the Soviets didn’t realize at that time was they were focusing on the wrong actions. As a result, they played directly into the hands of the U.S.
What actually happened was with HUGE nuclear-armed bombers flying around, the Soviets shifted their approach AND the U.S. was watching.
Nixon and his secretary of state, Henry Kissinger, were utilizing what they called the “madman theory.” They made a series of what seemed like irrational, volatile moves then let the Soviet Union and Vietnam discover the U.S.’ actions on purpose.
The goal was to convince the enemies that the U.S. would stop at nothing—not even nuclear annihilation—to end the war. Nixon and his troops hoped the threat of an unpredictable “madman” would be enough to bring all sides to the negotiating table.
Moscow and Hanoi thought Nixon was irrational. So, it wasn’t hard to convince the parties that the former U.S. president might push things further. Additionally, the move was made easier because the two sides were playing ENTIRELY different games.
Throughout both the Vietnam War and the Cold War, the Soviets were considered experts at “chess.” They read the table and moved their pieces around to gain strategic position. They wanted to win the game in front of them.
On the other hand, U.S. leaders were good at playing “poker.” They were reading the players across the table as opposed to playing the cards they have in front of them.
By playing poker when the opponents were playing chess, the U.S. was able to stay one step ahead of the Soviet Union and Vietnam.
Did you know such a strategy doesn’t only apply to wars but also to investing?
According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, if you want to avoid corporate money pits, you have to know exactly how to stay a step ahead of a firm’s management team.
In fact, some of the world’s most influential investors are also great poker players. Cases in point?
Hedge fund managers Steve Cohen and David Einhorn!
These folks know better than to take data or management’s claims at face value. They also look at a company’s actions to gauge whether it’s trustworthy.
That’s why Professor Litman says he and his team at Altimetry aim to follow in Cohen and Einhorn’s footsteps…
Every quarter, subscribers to Altimetry’s Microcap Confidential advisory receive the “Do Not Buy List.” This list features the worst of the worst microcaps Professor Litman and his team find—companies that have failed multiple tests on rigorous fundamental forensics checklists.
According to Professor Litman, one warning sign to look for is an overabundance of press releases, but with little to show for it. That’s something he and his team noticed with Blink Charging (BLNK), an electric-vehicle charging station company that was added to the “Do Not Buy List” in January 2021.
Photo from GlobeNewswire
In each update, Professor Litman and his team take it upon themselves to count the number of press releases Blink posts. The number is at 32 so far in 2023. Most of these materials describe conference presentations, new charging stations, and new partnerships.
The thing is, Blink spent far less time acknowledging that it has been hemorrhaging money for years. In the first quarter of 2023, it lost USD 0.53 per share. The company’s stock is down 88% since Professor Litman and his team advised investors to stay away from Blink.
What can you learn from this example?
Corporate executives love to make lofty promises—like a “royal flush.” Blink isn’t alone. In fact, lots of other companies use a barrage of announcements to cover their “weak cards.” That’s why the savviest investors must know how to read between the lines and call management’s bluffs.
So, when a company announces big, newsworthy events that suggest great prospects, don’t buy into it blindly. Take a closer look behind the scenes first. Remember that management carefully curates what it says to swing opinions and drive interest.
Keep this important investment insight in mind!
As investors, you should be playing poker, not chess. Spend most of your time looking across the table at key players. That’s the only way to know whether or not they can be trusted.
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
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“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
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Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
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