I am an avid player of board games. I also play Magic: The Gathering, a collectible card game in which players assemble decks of 60 cards, each with unique abilities and attributes, in order to find the most effective set of cards to defeat their opponents, who have assembled their own decks. It’s a very deep game with several layers of strategy, and has enjoyed considerable success over its nearly 25-year history.
There are significant similarities between assembling a well-rounded Magic deck, and constructing a sensible investment portfolio. In Magic, there are a few deck archetypes which define how the deck expects to win the game. In aggressive decks, the player hopes to defeat opponents quickly, using low-cost cards which can be played early on in the game, in order to overwhelm an unprepared opponent before the opponent has the chance to counterattack. The opposite of an aggressive deck is a control deck, which aims to control its opponent’s resources and the pace of the game, in order to play powerful high-cost cards only available later in the game. Regardless of the archetype chosen, players need to ensure that the cards in their decks synergize with each other. If a deck is constructed with the goal of winning in the first few turns of play, the deck would be made weaker by including even a powerful card if it is not useful until many turns have elapsed.
Constructing an investment portfolio requires similar thinking. When we devise an investment plan for a client, we make sure that we include stocks that work well together in a portfolio. However, in investing, that often means purposely selecting dissimilar companies. Too many similar companies, and the portfolio risks inadequate diversification. If the market or a particular sector has strong prospects, an investing bet could be lucrative, if successful. However, an unexpected event – a new competitor or a technological advance, for example – could result in the portfolio facing permanent losses. Our number one priority for client accounts is preservation of capital. That’s why it’s important that we diversify across sectors, geographies and economic profiles.
Another similarity between investing and Magic is how players and investors develop their own personal profiles. A player could be an expert in aggressive play, while an investor could have expertise in value investing. But it can be difficult to successfully switch between both playstyles and investor profiles. With sufficient practice, an adept control deck player could become a skilled aggressive deck player. A growth-oriented investor could potentially shift her investing style to a value-oriented one. But it’s important for the self-aware investor to know her limitations. Value investing is unusual in that our “games”, or investment holding periods, last years or decades, as opposed to a few minutes in Magic. That means investors get comparatively less hands-on experience with their investment portfolios than Magic players can manage with their decks.
In our case, we believe it wise to stick to our field of expertise. With two decades of value investing experience, we trust our experience and fundamental analysis to identify high-quality companies available at a fair price. We’ve been able to have success this way for many years, and we have the self-awareness required to know what we don’t know.
January 4th, 2018