Games We Play

A few months ago I read a very nice post by @Alex_Danco on why VC’s should play bridge. It’s worth reading & it inspired me to write from my own experience of learning this interesting card game along with my friends, during the lockdown.

For any investor it is impossible to ignore these steps, the data, the analysis, the partnership, the expectation, the execution & finally luck. 

In my view, the game of bridge is so well designed, that we get to see all these things play out in every single gameplay.

Data

Every game of Bridge starts with Bidding. I’ll spare you the mechanics which you can read elsewhere. When each player sees their cards, they have to evaluate the strength of their hand. They have to count the points they hold & start the bidding process by expressing their cards. Each bid acts like a source of Data for their partner & for their opponents. Each round of bidding done by the player, the opponents & the partner reveal the character of the hand held by each player. 

This iterative process is quite similar to gathering data for our investment ideas. Every round of exploration, reveals a unique layer of information about the business.

In Bridge, the bidding system is an encoded vocabulary used by the partners to communicate what cards they’re holding. It is a bit like our investment filters which we apply while expressing our investment ideas. These filters belong to different schools of thought & can represent the same data in a variety of ways. At the end of this conversation, both the partners know more about the strengths & weaknesses of each other’s hands.

Analysis

During each round of bidding the partners & the opponents calculate towards the end result of the final contract, which means the number of card tricks they can expect to make. This analysis is only as good as the information communicated while bidding. 

Similarly, in investing we have to look at the data not only at its own merit but also in the context of how much opportunity exists, for the business to grow, for the valuation to make sense & also relative to other investment ideas.

Partnership

Bridge is played as a partnership & perhaps this is the most understated aspect of investing. In Investing we have many partners (seen & unseen). Some of them we may never bother to treat as our partners. For instance, the company management, the Board of Directors, the Auditors, the Capital Markets, the Global Financial System,  the Media, the Industry Analysts & Experts, our Peers & if we are an institutional investor, our fellow Analysts & Fund Managers. Each of these partners is communicating their point of view to us & we have to use our filters to analyse it. All of them use their own vocabulary, much like a bidding conversation & encoded within that, lies the opportunity.

Expectation

Investing, like bridge, is a game of expectations. When we analyse, we think of a future outcome in the form of future value of the business or the number of card tricks we can possibly make. There’s no denying the level of uncertainty involved in achieving this goal. However, like in investing, we can think in terms of probabilities instead of certainties & hope that we didn’t expect beyond our means.

Execution

No matter how much we expect, it boils down to how we achieve it. We may have expected to achieve an outcome, maybe our expected returns or to make a certain number of card tricks, but we will need to act in the manner necessary to achieve those goals. That’s the idea behind the Card Play in Bridge & Portfolio Construction in Investing. We act decisively to reach the end result at every chance we get.

Luck

This is where Bridge imitates investing & life the most. As outside investors we are not in control of the businesses whose shares we own. As bridge players we rely on how the cards fall in our hands & in that of our opponent’s. In the end we can hope to get lucky & win tricks by using all the steps we saw above but we can’t guarantee the outcome. We don’t know how the cards are distributed in the same way we can’t know in advance when & what negative events can hit a business.

As a Bridge novice, I’m sometimes tempted to be overconfident during bidding & card play & I expect to win every hand I play, but all such illusions are instantly shattered when the gravity of card points & opponent’s skill pulls the partnership down to Earth. Perhaps with more experience I can hope to see the difference between not trying to win every hand but to stick to a well thought out game plan.

However, this is where the analogy between Bridge & Investing ends. No matter how sophisticated the game of Bridge is, it is still a Closed System. It has fixed rules & set expectations with limited range of outcomes. Games have a beginning & an end and failure is not catastrophic to personal well being.

While investing, we jump into an open system where different elements feed off each other to create enormous complexity. But if we get good data, if we analyse it well, if we work with trusted & reliable partners, if we keep realistic expectations, if we execute with diligence & hope that luck is on our side, then who knows investing may eventually mimic the game of Bridge.