The Difference Between Being Right & Getting Paid

In the comments section at SeekingAlpha of my latest post on PWE, I mentioned part of the frustration of holding PWE was missing out on this huge run-up in energy prices. Here’s an excerpt (complete with chart):

“I think USO may have some tracking error but it is still up over 100%. The spot price for WTI was hovering around $50 – $60 at the time and I don’t remember where nat gas was — probably around $6-$8 on Henry Hub. USO is +114%, CHK is +84%, PWE is +14.5% and PWT.UN is -4.5%, not including dividends. From this, it’s obvious that Penn West has badly lagged the oil bull, even if you include 15% for dividends. It’s also obvious that all of the capital appreciation was due solely to the Canadian dollar strength, as shown by the 19% spread between the US and Can listed stocks for Penn West. If you did the work, you’d also see that PWE lagged other energy trusts like PGH, AAV and even PDS. So if you want to criticize me for picking a lousy stock when I could have just bought the commodity and saved myself the trouble, that’s valid and something I’m already asking myself.”

I bring this up because of a recent email exchange with a reader where we discussed value realization and Marty Whitman’s classic book, The Aggressive Conservative Investor (which I recommend to any value investor). One of the key concepts in his book, rarely mentioned by other authors, is the concept of investor “bail-out”, which is simply his term for getting paid fair value for your investment. Any investment can look great on paper, on the stock screen, in your head, etc but if no one ever pays you fair value, what use is it?

Experienced poker players are quite familiar with this concept. Getting good cards is only part of the task. The main part is getting paid off. If you’re dealt pocket aces and go all-in only to watch everyone around the table fold, what good was the hand?

Analogies in this case can go both ways. Professional poker players know that over a large sample of hands, everyone gets roughly the same cards. It’s just random distribution — over a large enough sample, everything evens out to its statistical probability. So the key to being a good poker player is more about your strategy, discipline and other innate qualities (like reading people, calculating abilities, etc.) than about the cards.

The stock market is much the same. Everyone has access to (mostly) the same markets. Granted, Warren Buffett, Goldman Sachs, etc. have access to opportunities that most of us don’t but with the advent of ETFs, index-linked products, global brokerages and so on, access to investment opportunities is somewhat equal. With the Internet, even small retail investors can diligently research most situations. If everyone has the equal access and knowledge to the same markets, then it’s very much the poker player’s experience: being right only takes you halfway there — execution and picking the right vehicles at the right price is just as important.

This dynamic is one reason why many value investors choose to ignore macroeconomic analysis and focus exclusively on bottoms-up, fundamental analysis of companies. I see the appeal of this style as there are less moving parts and fewer decisions. Personally, I blend both when assessing investment valuations. I can’t help it — I’ve always been a big picture guy in everything I do.

But just as poker styles vary widely, so do investing styles. If you’re in it for the long haul, it’s best to pick a style that suits your temperament.

More on this topic (What's this?) Read more on Penn West Energy Trust at Wikinvest

Leave a Reply