Dollars and Jens
Monday, December 18, 2006
Investing and Bridge
If you assumed from the title of this entry that I'm going to try to sell you a large structure in New York City, you've misunderstood.
Aside from an affection for cheeseburgers and cherry Coke, one of the personal facts commonly known about Warren Buffett is his love of bridge, which he periodically plays online with Bill Gates.Your hunches may be right for a while, but be careful about trusting them.
Why bridge? Though Graham wasn't talking about Buffett at the time, he offers a clue:
"I recall to those of you who are bridge players the emphasis that bridge experts place on playing a hand right rather than on playing it successfully. Because, as you know, if you play it right you are going to make money and if you play it wrong you lose money - in the long run. There is a beautiful little story about the man who was the weaker bridge player of the husband-and-wife team. It seems he bid a grand slam, and at the end he said very triumphantly to his wife ‘I saw you making faces at me all the time, but you notice I not only bid this grand slam but I made it. What can you say about that?' And his wife replied very dourly, ‘If you had played it right you would have lost it.'"
It seems to me (and it has certainly been my experience) that it takes an enormous amount of restraint to focus on playing every investment hand "right," according to an established discipline, allowing the law of averages to work in your favor, rather than trying to win every hand. I would guess that this is exactly what appeals to Warren Buffett's temperament. Over the long-term, good investing requires it.
An enjoyable little piece. I wish I remembered where I found it. If you don't read the whole thing, at least take a look at the chart of 20-year returns in the S&P compared to the 20-year return you'd expect if you assumed a terminal P/E of 16.7.