When I was ten or twelve or something, I sat next to a man who was a professional gambler.
It was at some dinner my parents had dragged me too. He was an incredibly nice man and humoured my incessant questions and curiosity.
I can still remember the core lesson to this day.
Obviously, you have to count and memorise the card order from a five-pack deck, and know every single probability and outcome so well that it’s second nature. But that’s not it.
The key point was that the margins are incredibly fine. The bank has skewed the odds in its own favour, so that even the most skilful player has only a 49.5% chance of making money on each hand, or in the long run.
But with meticulous memorising, card counting, and probability calculations, it was sometimes possible to say that your odds had shifted from 49.5%, to 50.1% (I obviously can’t remember the numbers exactly – I’m making these up).
In order to give yourself a chance of actually making money in the long run, what you had to do was bet small at all times, until the odds shifted just marginally in your favour, and then bet big – really big.
Because cards, ultimately, are a game of odds and probabilities, no more. “Skill” means understanding them.
And so, by betting big regardless of other considerations when the odds are narrowly in your favour rather than materially against, you counterbalance the usual skew, and tilt the odds maybe in your favour.
The margins are so fine and luck plays such a large part, that such a strategy can deliver very lean years or very lucrative ones. But over time, it should deliver a positive return.
This reminds me of the quote from Howard Marks that in investment you have skill, timing and aggression, but with enough of the last two you don’t need much of the former. Regardless of other considerations.
That I suppose is especially true now that index funds are so common and so cheap.
And this line of thinking forms quite a large part of my investment view, to be honest.
History tells us that in the past, the more optimistic people become, and the higher valuations go, the lower your chances of excellent returns.
That’s just the nature of the beast, it would seem.
That’s why I like to try and become more bearish if things are racing upward, and more bullish if they are crashing downward.
Unusually, I’ve experienced both in rather quick succession this year.
The odds of excellent returns seem rather diminished now that markets are so far off their lows, back in the stratosphere of valuations and expectations. Our gambling analogy would say that when the odds are against you, it doesn’t mean you can’t win so it’s still right to be small, but the time to bet big is yet to come.
Just look at Warren Buffett, who sold off the rest of his huge airline stakes last week, and allowed his cash pile to build because despite the huge falls, opportunities for deployment had not presented themselves quite yet.
How is the pandemic affecting Africa?
On 24 April, I saw this chart, and it made me scared:
Source: Remi Tetot, on Twitter
Why? Because while we in the developed world are having intense debates about the balance between the physical and economic health of our nations, and covering the pay of all our furloughed staff, in many parts of the world that isn’t even an option.
Across swathes of Africa, if you don’t work, you do not eat. There is no working from home, there is no social distancing, there are no ventilators and there are no tests.
So while the virus has yet to attack many parts of the developing world (or is it just a lack of testing?), a Guardian article points out that it is killing them in other ways – “lost jobs, ruined businesses, increased poverty, rising malnutrition and risk of famine, and a prospective increase in untreated, non-Covid preventable illnesses.”
The World Health Organisation, for example, has announced that polio vaccinations for over ten million children in Africa will be delayed as resources are switched to fighting Covid-19. It admitted the move would inevitably lead to more child polio cases. How do they, or we, or anyone quantify such things?
It was questions such as these that led the philosophers of old to form the principles which now guide our lives. Hopefully when dealing with the global fallout of this virus, our thought leaders can live up to the task.
In poorer nations, the crisis could produce famines of “biblical proportions”. The number of people facing hunger could double to more than 250 million, the World Food Programme said. The thing is, we in the developed world are pretty much focused on ourselves right now, leading to loss of food aid and disrupted supply chains.
Its dire and depressing warning is that 30 million people could die within just a matter of months, putting many of our troubles into some kind of perspective.
To put an energy perspective on things, think especially about the second shock that we’ve had in 2020 – the oil shock.
Oil-producing nations – Nigeria, Angola, Algeria, Egypt and more – face another level of challenge because it’s not just a company going bust (the only job losses that extinction rebellion will allow), where assets will be recycled and employees re-hired by the new owner. Instead, it’s the very basis of many of their economies, their tax revenues and their GDP.
And if even if their cost-per-barrel (the oil industry’s measure of cost of production) is low, like in Saudi Arabia, that’s not the most important thing – it’s the GDP breakeven. That is, how much does oil need to sell for per barrel for the countries revenues to match its liabilities. And trust me, it’s well above where it is now.
That’s the near-term challenge, which shows that Saudi Arabia couldn’t actually carry on with its price-crashing manoeuvre for as long as people thought. That oil revenue is desperately needed both for immediate liabilities, and Prince MBS’s Vision 2030 projects.
Renewables offer an interesting challenge for such states because in fact, investing in renewables would allow them to export their reserves before it’s too late, now that it seems clear demand will peak before supply.
But doing so would accelerate the transition away from oil usage or dependency.
Africa faces a dire situation today, tomorrow, and next year. While we in the developed world discuss where the balance lies between getting back to work, going on holidays, and risking the welfare of all our relatives – in Africa the landscape is quite different, and the virus carries an altogether different threat.
This remains a global threat, and we must try not to forget it even as we look after our own.
Finally, a reminder that you can follow my various retweets of other people’s good insights and charts on my Twitter page. Low on original content, but high in quality as a result: twitter.com/WinderKit.
All the best,
Editor, UK Uncensored
PS Look at this historical note, from 1 May 1956.
Source: Jason Zweig on Twitter
Little did they know that he’d lose billions betting on airlines in the 21st century!