March 29, 2024
By Steve Blumenthal
“It’s a wonderful thing to be optimistic. It keeps you healthy and it keeps you resilient.”
– Daniel Kahneman
Daniel Kahneman passed away this week. Kahneman was an Israeli-American author, psychologist, and economist notable for his work on the psychology of judgment and decision-making. In 2002, he was awarded the Nobel Memorial Prize in Economic Sciences for his work in behavioral economics, including his development of prospect theory, which tests prevailing economic theory that assumes human rationality in decision-making and establishes that, instead, humans largely make decisions based on biases and an asymmetrical assessment of they have to lose vs. gain in a given situation. Much of his work was done in collaboration with Amos Tversky, with whom he developed prospect theory and who died in 1996.
Kahneman is perhaps most widely known for his best-selling book Thinking, Fast and Slow, which summarizes much of his research and is described as a “groundbreaking tour of the mind” that “explains the two systems that drive the way we think.” Maybe you’ve read it. I plan to re-read it this holiday weekend. More on the book in a minute. In 2011, Foreign Policy magazine named Kahneman in its list of top global thinkers, and in 2015, The Economist listed him as the seventh most influential economist in the world.
Kahneman was professor emeritus of psychology and public affairs at Princeton University’s Princeton School of Public and International Affairs and a founding partner of TGG Group, a business and philanthropy consulting company. He was married to cognitive psychologist and Royal Society Fellow Anne Treisman, who died in 2018. Imagine the kinds of discussions they would have had at their dinner table.
Back to the book. As I mentioned, Thinking, Fast and Slow explores our cognitive biases and the two systems that drive—often unbeknownst to us—the way we think and make decisions. He describes System 1 as the fast, intuitive, and emotional system that relies on stereotypes and storytelling and is prone to overconfidence. System 2 is the slower, more deliberate, logical system that, while capable of complex reasoning, often lets System 1 take the lead. But it’s not overly heady. Kahneman breaks down the research into clear, manageable pieces of information and encourages readers to better understand their own thinking shortfalls so that they can make better decisions that align more fully with what they really want out of life. This book is a must-read for anyone interested in psychology or economics or who simply wants to understand the complex machinery of the human mind.
When he was awarded his Nobel Prize, Kahneman wrote an article about his life and work that was published on the NoblePrize.org website. I enjoyed it, especially the following Pascal quote he shared: “Faith is God made perceptible to the heart.”
Grab your coffee and find your favorite chair. In the direction of investor behavior, I share an X post by Chamath Palihapitiya about the game of poker and how it relates to investment thinking. I hope you find it insightful. But first, Ray Dalio’s China’s 100-year storm piece is out and, as usual, worth the read.
On My Radar:
- In China: The 100-Year Storm on the Horizon and How the Five Big Forces Are Playing Out
- Chamath Palihapitiya, All In
- Random Tweets
- Trade Signals: March 27, 2024
- Personal Note: Happy Easter
See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.
In China: The 100-Year Storm on the Horizon and How the Five Big Forces Are Playing Out
By Ray Dalio
Chamath Palihapitiya, All In
- Strength: A player may go all in if they believe their hand is strong enough to win the pot and want to maximize their gain. It puts pressure on opponents, forcing them to make tough decisions about whether their hands are good enough to match the bet.
- Bluff: Alternatively, a player might go all in as a bluff, hoping to intimidate opponents into folding better hands due to the risk of losing a large number of chips or being eliminated from the game.
- Survival: In tournament play, a player might go all in out of necessity when they have a short stack (a relatively small number of chips) and need to either win the pot to stay in the game or be eliminated.
When a player goes all in and is called by at least one opponent, the action ends, and the hands are turned face up. If no other betting is possible, the remaining community cards (if any) are dealt out, and the best hand wins the pot. If the player who goes all in does not win, they are either eliminated from the tournament or, in a cash game, may choose to buy back in if the game rules allow.
Here is what Chamath posted on twitter (Source: @Chmath):
Earlier this week on Spaces, someone asked me about how poker has informed my view of business risk. In short, profoundly.
Poker is a fundamentally defensive game when played at an elite level. A defensive game doesn’t mean you can’t generate huge profits. In fact, poker can yield enormous profits but the way it happens is unintuitive to most.
Maximum profits in poker, and other defensive games for that matter, occur when your error rate is less than your opponent’s error rate.
So their errors – your errors = your profit. If you minimize your errors, you maximize your potential profit.
This simple formula forces you to learn that a lot of the time, the biggest enemy of your success is you. By managing yourself in a predictable, reliable way, you give yourself time for your opponent to self-own themselves. This is true in poker, but it is even more true in business.
As an example, suppose you have an R&D budget and you’re trying to build a product. Once you have some initial product market fit, the most important thing to do is to allocate your remaining resources in a thoughtful way.
You should have many small bets that extend the product area. If any one of these fail, it won’t be life-threatening and you will have learned something that will reduce your future error rate. These small bets can then ladder into a few medium-sized bets which ultimately lead to a few large bets. In such a process, you’ve not only taken many bets, of various sizes, you’ve also done this over a long quantum of time. In that same time, a less organized competitor will eventually do something wrong/stupid/both.
Said differently, you’ve de-risked your error rate in a thoughtful methodical way and have evidence that things are working while giving your competitor enough time to flail and eventually fail.
In so many companies that I’ve invested in and companies that I’ve worked for, I’ve seen enormous bets being made too early, and mostly out of ego. These bets are rarely rooted in data and most have eventually been rolled back.
The second thing to understand in poker is that when you make many small bets, you can play more hands – and some of these can lead to huge pots. Some of the biggest pots I’ve won have been with 2-2 and 8-6 suited while some of the biggest pots I’ve lost are with A-A!
In business, as in poker, you have to make unconventional bets if you want to win huge pots. And the no-brainer bets are rarely big winners and can sometimes come back and sting you. So as an investor, by keeping my bets small I keep my errors small while giving myself a chance to win big by doubling and tripling down at the right time. (Bold emphasis are mine)
SB here: We wrote a paper called How We Think About Wealth. If you’d like a copy, please simply reply to this email (if you are reading it in your inbox) or email me at Blumenthal@cmgwealth.com. A thinking around wealth construction that allocates 80% of one’s wealth to CORE types of investments. The remaining 20% is invested in EXPLORE types of opportunities. It is sized small so that no one investment can blow up the ship. Start with a percentage or so on each bet. Look for an edge in technology, good management, and an extremely large business opportunity. Those are things you can know. Increase exposures, as evidence suggests. Never size it so that it could damage your wealth if you are wrong. I like what Chamath wrote. Makes sense to me, anyway.
Source: @charliebilello
I retweeted this next one earlier this week.
Source: @kobeissiltter, BLS
Keeping an eye on the CRE – Office Real Estate Market:
Source: @triplenetinvestor, @ttmygh
I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.
You can follow me on X (formerly Twitter) @SBlumenthalCMG.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Notable this week:
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I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.
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The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.
Personal Note: Happy Easter
I’m traveling to Savannah, GA, early next week. I will happily celebrate my birthday on Tuesday on the golf course. It’s hard to believe April is around the corner and even harder to believe I’m another year closer to shooting my age. However, scoring a 63 is not going to happen in this lifetime. Time is going much too fast. I’m thrilled to report that I’ll be spending Sunday, April 14, at the Masters at Augusta National.
It won’t be my first time there. I was fortunate to play at Augusta National in 2018. My dear friend John Mauldin had gotten an invite from one of his long-time readers, and I was able to join him. Though “able” is an understatement, the reflex answer when asked is a mandatory, resounding YES.
My father was an avid golfer with a bit of a funky swing. “Did I loop at the top?” he’d always ask. Yes, Dad, you looped. He’d call me almost every Monday, telling me, “I just figured out what I was doing wrong.” I’m not sure he really did figure it out, but he truly loved the sport regardless of his swing. The Master’s Tournament was a staple in our household every April, even when I was a small kid. Dad passed in 2011, and each of us in the family had some of his ashes to spread where we felt best. I took mine and, with my siblings, said a prayer standing at 11,000 feet at the top of Snowbird (a ski resort in Utah). It was one of Dad’s happy places. Then, in 2018, when I told my sister Amy that I was going with John to play Augusta National, she sent me her share of Dad’s ashes. I put them in my golf bag, finished hole number 11, and quickly raced to a spot just behind the 12th tee box before my hosts joined me. If you know the tournament, you know the exact spot. I closed my eyes, smiled, and shed a tear for Dad. Now, at noon on Sunday, April 14, I’ll be sitting behind the 12th tee box again, watching the Masters with my old man.
Sadly, this public statement admitting ashes-spreading will forever kill my chance at an Augusta National membership, but boy, oh boy, I am so in love with that place! I sometimes wonder if the members know just how far their wonderful tournament ripples through others’ lives.
I want to wish you a happy Easter. My large family is a mix of several religions. I’m Jewish, and Susan is Christian. Some of us have more faith, some less. I enjoy watching her coach at an all-boys Augustinian school, Malvern Prep, where two of our six children went. Neither of the two are particularly religious, but they felt the love and bond of brotherhood.
I believe there is beauty in all religions. Love in the heart, kindness to others, support—how we lift each other when we are down and celebrate the joyous times. Whatever your faith is, I hope this note finds you happy. Magic happens when we are happy.
Wishing you peace and happiness and a wonderful holiday weekend.
Kind regards,
Steve
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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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