A Game of Chance –
“What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur.” – Annie Duke, Thinking in Bets
There’s no doubt the uncertainty of our economic environment will venture along as far as the eye can see. While we could spend time recapping the latest market twists and turns, let’s switch gears a bit and talk about strategy instead.
In a past Oaktree Capital Management memo, Howard Marks drew some fantastic parallels between the investing world and games of chance.
In the factoring world, it sure does feel like everyone’s taking a bit of a gamble these days, but there can be a method to the madness. If you play your cards right, you just might come out on top.
Life’s a Gamble
After recapping how playing card games and gambling throughout life influenced the way he views investing, Marks dives into why gambling and investing are two peas in a pod.
In games of chance, depending on what you play, there are three basic ingredients: hidden information, required skill, and luck. You may not have all of the elements, but every game has at least one.
For example, in roulette, there’s no real skill required and everything’s laid out for you to see. The only thing you need is luck. Compare that to blackjack where there’s hidden information (you don’t know which card the dealer will draw, unless you’re a card counting guru), required skill, and of course, luck.
Like these games, the investing world is strikingly similar. Depending on which flavor of investing you choose, you’ll encounter that same combination of hidden information, skill, and luck.
In active investing, you’ll experience all three elements. Investors don’t know how a company is doing until earnings reports come out, or the results of a drug trial until they’re public.
And of course, savvy investing does entail a certain level of skill. Luck comes into play, too, through the nature of our unpredictable world.
In the factoring world, hidden information might come in the form of poor reporting, or not being able to get the insights needed to identify fraud risk. It could also mean getting side swiped by operational issues that had been bubbling up without your knowledge.
Decisions, Decisions
So what’s a factor to do? Marks says the essence of it all is in gauging the likely outcome. We can’t always predict the outcome, but we can manage risk.
When we put our focus on our processes over the outcomes, we can weather storms much more efficiently. This looks like placing a big emphasis on the habits, actions, and real-time decisions to drive portfolio outcomes, steering away from post-funding assessments.
We can also lean on real-time data to identify key trends and reduce cognitive biases, ensuring informed decision-making. Making sure we keep the lines of communication clear at our firms helps cut down on operational risk as well.
Speaking of operational risk, we need to get skilled at building a culture of operational excellence. This allows us to navigate any uncertainties that arise and it allows us to equip our clients with the tools they need to make informed decisions.
On Goes the Journey
These times do feel like they’re a dance between risk and chance.
Depending on where you are in your own factoring adventure, your place in the hero’s journey could vary greatly from the hero next door.
No matter where you are on the path, right now, we’re all navigating uncharted territory. Let’s take a page out of Marks’ book by gauging our outcomes and hedge our bets by mitigating risks.
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Until next time,