What investors can learn from all the new Robinhood traders and a professional poker player

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I’ve kicked off my summer reading with a great book by Annie Duke called Thinking in Bets. During her career as a professional poker player, she won more than US$4 million from tournaments and was a World Series Poker champion. The book really couldn’t be more fitting given the recent rapid shift from online sports gambling to day trading.

Robinhood, a commission-free investing app in the United States, has been getting a lot of attention lately thanks to prolific social media pundits such as Dave Portnoy, president of Barstool Sports (an online sports blog) who goes by Davey Day Trader Global.

Portnoy tweets about his day-trading activity to his 1.5 million followers with radical comments such as, “I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now,” and, “Why take profits when every airline goes up 20% every day. Losers take profits. Winners push the chips to the middle … I should be up a billion dollars.”

Day trading has grown so much in popularity during this crisis that Robinhood now has more than 13 million accounts. It’s not a coincidence that the average demographic profile of a sports gambler lines up perfectly with that of a Robinhood user, and with sports shut down, why not turn to the stock market and place a bet on the underdog?

One way or another, the odds play out and those making such speculative bets always lose over the long term

That’s why it’s interesting to look at the positions many of these Robinhood accounts are holding. According to Robintrack, as cited in Investopedia, among the top 10 positions traded on the platform are Hertz Global Holdings Inc., which has filed for bankruptcy, and struggling airlines such as American Airlines Inc. and Delta Air Lines Inc.

Oil also cracked the list, including Oasis Petroleum Inc., Direxion Daily S&P Oil & Gas Exp. & Prod. Bull ETF, and Valaris PLC, an offshore oil driller also exploring bankruptcy.

The activity has become so ridiculous that despite Hertz’s stock being worthless, the demand for it was so strong that day traders bid it up to more than $5.50 from 55 cents U.S., and the company even considered issuing US$500-million worth of equity that would essentially be used to pay back its debt holders until regulators said no.

Casinos allow people to make bets with very poor odds, but even they don’t allow those with zero odds.

Some strategists, such as legendary investor Jeremy Grantham, have been pointing to this latest day-trader activity as a sign that a bubble is forming in the market. But we would argue there have always been excessive speculative areas of the market, including gold miners, junior oil and gas plays, cannabis, Bitcoin and, yes, even Canadian real estate. One way or another, the odds play out and those making such speculative bets always lose over the long term.

Some of us in the industry may find all this entertaining, given the lunacy of what we’re witnessing, but there are some important lessons in this, even for seasoned investors, because we’ve all fallen victim to overconfidence and irrational behaviour in one fashion or another.

Annie Duke in her book summarizes the importance of not allowing emotion to enter the decision-making process and maintaining a humility that recognizes near-term results don’t mean we’ve necessarily made the right decision. She calls this “resulting.”

It’s imperative to take a step away from the crowd, avoid confirmation bias and get a snapshot that is as objective as possible in order to make the best decision. Then ask yourself if the latest win was luck, how could you be wrong with the longer-term thesis, and, if so, what is the potential impact?

“Thinking in bets starts with recognizing that there are exactly two things that determine how our lives turn out: the quality of our decisions and luck,” Duke writes.

In the oil business, one that is known for excessive risk-taking, there is a great adage about the biggest danger to a new company is its first well being its best well. The goal should be consistency and repeatability, both of which are impossible to achieve without humility. That’s something most of us should be betting on.

Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.

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