Nov 4, 2021

Just Enough to Be Dangerous

Back in the mid-2000s, I was invited to an underground Wall Street poker game in New York City. It was held in the basement of a large restaurant on the West Side. I told the organizer that I had never played Texas Hold’em before, and he said, “Even better!”

I wasn’t looking forward to it. It was a $200 buy-in, and I was sure to lose. This was in my cheap days when I was bringing cans of SpaghettiOs for lunch. $200 was a lot of money.

I remember feeling really nervous. Someone quickly explained the rules to me before the game started, and I wasn’t really sure what I was supposed to do. I didn’t know poker etiquette, and I kept screwing things up.

Nonetheless, I won the whole thing and made off with $2,000.

Well, the other traders at the game were pretty sore about that, so they invited me back to a second game, figuring it was just a fluke. Beginner’s luck. I won the second game as well, earning another $2,000.

I still had no idea what the hell I was doing, but I figured I must be doing something right. So, I opened a PartyPoker account and entered a tournament with a $20 buy-in. There were 2,200 people in the tournament. I finally busted out around 3 am, coming in third and winning $2,700.

By this point, I was hooked. So, I ordered poker books by the truckload and read them in my free time. There was a lot to learn. I hadn’t realized how nuanced the game was. Layers upon layers of strategy.

I entered my next poker tournament much smarter and much more well-versed in poker theory … and I never won anything of any significance again.

What is going on here? I have a theory about this. In games of skill and chance—like markets, poker, and even fishing—it helps to be really, really smart, and it helps to be really, really dumb. As for everyone in the middle, they know just enough to be dangerous.

Think about all the people who bought Tesla (TSLA), or bitcoin, or Shiba Inu—simply because it was going up. It’s going up, dummy! I can tell you that I’d have a much bigger bank account if I’d simply bought the stuff that was going up.

On the other end of the spectrum, you have people with really great information, and in some cases, something approaching inside information, which is also a can’t-lose proposition. Everyone in the middle knows just enough to be dangerous. And I suspect that describes a large number of readers of this newsletter.

Now, there are some crude memes floating around about the “tyranny of the mid curve,” the idea that dumb people make money, and smart people make money, but average people get killed. But it’s not about IQ—it’s about your depth of understanding of the game.

Imagine investing in the stock market knowing what P/E is and little else, and you go around buying all the cheap stocks. Imagine investing in the stock market with an MBA under your belt but no practical experience. I can tell you that my early days of investing (in my personal account) pretty much consisted of “scratching around.”

This really explains the phenomenon of beginner’s luck, especially in poker. Someone who doesn’t know how to play poker is very unpredictable and difficult to read, as I probably was in those three tournaments. I remember pulling off one outrageous bluff. New players are dangerous because they don’t adhere to the conventions of the game.

There was an incident on financial Twitter last week that’s worth commenting on. Mark Minervini, one of the traders featured in the original Market Wizards book, was on CNBC to talk about some stocks. When someone interrogated him about what one of the companies did, he had no idea! He claimed the sound quality was breaking up, and he couldn’t hear, but that seems implausible.

But if you know Minervini’s trading style, you know he doesn’t need to know what a company does. He only cares that it’s going up. He was one of the original great trend traders. Minervini is staying at the left side of the information curve—he is intentionally being dumb and buying the stocks in uptrends. Some people make a great living doing this. If he knew what the company did, he would know just enough to be dangerous.

So, I think about this a lot. You and I don’t have access to the same kind of information that the pros do. We are perpetually stuck in the middle, knowing just enough to be dangerous. In response, I have tried to get dumber as I advance in my career. If a stock is going up, I buy it. Honestly, this hasn’t worked out all that bad. Sometimes I buy the highs, but it will consolidate for a period of time and then go even higher. Some stocks I should have bought because they were going up: Zoom (ZM) and Moderna (MRNA). I had ample opportunity.

BE SMART

While many newsletter readers could benefit from getting a little dumber, some people just need to be smart. In fact, that’s the name of my new podcast… BE SMART: How Not to Be an Idiot with Your Money. This isn’t a stuffy financial podcast—it’s just 15 minutes of me talking to you about money, the markets, and anything big happening in the world.

It’s fun. It’s free. But mostly, it’s about you and what you want to know about money. That’s why I’m hosting a LIVE Q&A for listeners on Monday, November 15th, at 1 pm ET. And I’m saving special seats for my 10th Man readers.

So, check your inbox for the link to this LIVE video event on the morning of the 15th. You can also send me your questions in advance by clicking here.

Party Time

Hey, eight days from today is The Daily Dirtnap party—and The 10th Man subscribers are invited. Don’t worry if you don’t know anyone. Everyone is cool. And the music is going to be amazing. Click here to grab your tickets.

Jared Dillian

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