Buy Right Sit Tight - 2019


What Investors Can Learn from James Holzhauer? Part 2

By Amit Rupani

Quick Recap of Part 1: If you have been a fan of Jeopardy! America's favorite quiz show, you know who I am talking about. He was an unstoppable force in the show's modern 35-year history. Holzhauer won $2,462,216 in 32 days on Jeopardy! He has made it to the Hall of Fame of this quiz show creating many new records. No one in the history of this game has played the game the way he played and hence is considered as outlier by previous champions. Now you might be wondering what does a quiz game winner has to do in an investment column. Since there are many commonalities in Jeopardy! game show and Investing, there are a lot of things that investors can learn from James Holzhauer. Commonalities like having multi-disciplinary knowledge, lightning reflexes, apply “right" strategy, bet at “right" time, and good luck.

In Part 2 we will look into the specifics of what we can learn from James Holzhauer about Investing.

Markets Evolve: If a winning strategy has worked in the past it will be copied by many others. New players will try to copy successful strategy which will amplify competition. This applies to pretty much any field. In the early nineties, in 50 over One Day International cricket games, conventional strategy used by many teams was to start their innings batting cautiously. Save wickets, grind through middle overs, and attack in last 10 overs by keeping wickets in hand. In the 1996 Cricket World Cup, Sri Lanka surprised oppositions by using a new strategy. They sent the famous pair of Romesh Kaluwitharana and Sanath Jayasuriya pinch hitters as openers and they attacked right from first ball. They took maximum advantage of fielding restrictions in first 15 overs. It worked well for Sri Lanka and they won 1996 Cricket World Cup beating favorites Australia in the finals. This successful strategy of attacking in first 15 overs was copied by other teams and now it is a very common strategy.

Warren Buffett made killings in 1960s and 1970s applying what he learned from Ben Graham by using net-net bargain strategy in the stock market. This winning strategy laid the foundation for him for many bigger things in future for his company Berkshire Hathaway. He eventually evolved into buying high quality compounder businesses at reasonable price as competition and his size didn't allow him to use the old strategy.

James Holzhauer's innovative strategy worked very well as he went after higher dollar questions first, taking money off the board. He didn't fear making big bets during Daily Double or Final Jeopardy questions. Eventually, other participants realized that the only way to beat Holzhauer was to apply his winning strategy. His style was copied by others and his winning streak of 32 days came to an end with total winning amount at $2,462,216. In short – one has to keep learning and keep evolving as change is the only constant.

Know Your Stuff: Holzhauer had deep knowledge of many disciplines and an ability to recall information at lightning speed. His very high rate of answering questions correctly showed he knew his stuff very well. He never attempted to guess any questions where he had tiniest of doubt. Your points are deducted for a wrong answer in Jeopardy!

As an investor we need to have very good understanding of the business that we are invested in. If we can't understand how the business is going to make money, there is no point in investing your hard-earned money in it. An investor needs to strive to not only understand the business model but the overall dynamics of the sector and industry that it operates in. Knowing your business very well helps an investor to hold it through thick and thin as the roads of business are riddled with potholes. Eventually, all businesses have to ride through the road that is full of potholes. Great businesses do a good job of surviving through tough economic cycles and thrive when there are tailwinds. It becomes very critical to know if your business is good enough to drive through the tough road.

Behavior: Holzhauer not only knew his strengths and weakness very well, but he made his smart moves after analyzing another participant's behavior. He said “The aggressive betting on the daily doubles is one of my trademarks. People should be betting big, and people who have a normal day job may not feel as comfortable betting this much money, though really, it's just points on a scoreboard until you actually win the game. I think there's a mental block for betting big amounts that doesn't exist for me but it does for other people. So that's a big advantage my background gives me." He said in one of his interviews. He beautifully capitalized on irrational behavior of his opponents.

Warren Buffett has very well said that “The stock market is a device to transfer money from the impatient to the patient." Success in investing is mainly determined by how we behave in the market assuming one has bought the “right" business. The real play begins after a stock is bought. It will either go down, up, or remain sideways. Each movement will give an itch to an investor to act. If it goes down, one may sell out of fear of it falling more. If it goes up, one may sell out of fear of missing out on gains. If it remains sideways, one may sell out thinking it's not going anywhere. If a “right" stock is bought, all of the three possible movements will happen over long holding period. Instead of tracking the stock price, investors will be served well if they keep eye on the underlying profits. There is a saying that stock prices are slaves of earnings. If the underlying profits are growing, stock price will have to match with growing profits.

Happy investing!

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Amit Rupani, CFA is an Independent Investor, practices Value Investing principles, manages money for long-term wealth creation through Equities asset class. Email: rupaniamit@yahoo.com