Games vs Gamesmanship: What Game Are You Playing?

Games vs Gamesmanship: What Game Are You Playing?

As it relates to the stock market, and specifically the price action of stocks, every so often we hear the term “games” being bandied about.  When price action is all over the place, when we see wild swings UP and DOWN, for what seems like no particular reason people will say “somebody’s playing games” (or something to that effect).

But what games are those somebody’s playing?

And sometimes I can’t help but wonder, are they really just playing themselves?

Some people think the stock market’s nothing more than a big game.  A game that’s designed to take their money.  Therefore in their minds the stock market is more akin to gambling.  You might as well go to the casino, they say – at least there’s entertainment value to be had there (plus free food and drinks).

I don’t know about how you feel, but I really dislike hearing people describe the stock market as a “casino’” because that’s not a true statement.  Casinos specialize in games where the odds are in their favor.  That’s why the house always wins in the long run.  Casinos keep the lights bright, the AC pumping, and the drinks flowing because they know time is working in their favor.  The longer somebody plays the more likely they are to walk away a loser.

Blackjack’s the only game where players can develop a slight edge, a 2% to 5% advantage versus the casino, but that’s only when players play their cards exactly right every time!  That type of play requires a lot of effort and commitment.  There’s a serious learning curve, too!  Most people don’t start out with a big bank roll either so they’ve got to work their way up to a point they’re dealing with more impactful amounts of money.

It can be a fun job!

It’s different for sure, but it’s still a job.

Casinos call these professionals “Advantaged Players”.

You want to know something else?  I find it quite interesting actually, once someone or multiple players (often working as a team to beat the house) establish themselves as advantaged players, casinos no longer want their business!  In other words, when advantaged players reach a point where they can reliably beat the casino it’s GAME OVER for them (right at the pinnacle of their Blackjack careers too – what a shame!).  And that’s because house rules are now working against the casino.  The longer these advantaged players play the more likely they are to win.  Over the long-term the odds actually shift in favor of advantaged Blackjack players and away from the casino, so the casino kicks them out!

What else would a money-taking operation do when threatened by a customer who’s in the opposite business?  You don’t want ’em hanging around!

To stay in business advantaged players have to start wearing disguises and shopping around for casinos where they aren’t well known (or on a facial recognition database).  It’s pretty crazy!  It becomes this cat and mouse game between the professional Blackjack players and the casinos.  Griffin Intelligence is like Big Brother working on behalf of the gaming industry – you can’t make this stuff up.

“Inside The Edge” is a documentary about the adventures of a professional Blackjack player, should you have any interest in learning more about some of the extremes people go through just to get a seat at the table.  It’s all about the price they pay to be a winner.

Two of the things that surprised me about Inside The Edge (pleasantly surprised me) relate to money management and volatility.  No different than a portfolio manager in the market, you can play every situation and hand exactly right, exactly by the book, but that doesn’t mean you’ll end up with a “right” outcome.  These Blackjack players can go on fantastic runs where their bankroll increases 300% or 500%, but inevitably they will have draw-downs of 33%, even 50% or more along the way.  So they have to be mentally prepared to have bad runs once in a while.  It’s part of the process.  It’s part of the business – no avoiding it -unless you’re Bernie Madoff (he was the only guy who could generate smooth consistent returns ad infinitum).

Assuming you strive to be an advantaged player, why is playing the stock market superior to playing Blackjack?

Your odds of winning, your edge, with stocks can be way better than 2% and 5%, for starters.  It’s hard to say exactly how much of an advantage one can attain, in percentage terms, but my experiences and belief would say the number is way above 2% or 5%, which is a fairly slim edge.  Depending on your strategy, when combining elements of fundamental and technical analysis, the margin of safety and odds of winning can be much larger with stocks.

Another nice thing about stocks, as a profession, there’s lots of different strategies that can work!  Whereas there’s really only 1 or a few best ways to be an advantaged Blackjack player.  One of the secrets to winning consistently with stocks is marrying strategy with risk tolerance and personality.

With stocks there are really no limitations.  You can be a high-limit player, a low-limit player, or both.

Best of all, with stocks, nobody from the Griffin Intelligence agency is going to be breathing down your neck!  And pit bosses won’t bark you out of their casino!  You don’t have to wear disguises and travel around the world to avoid being outed as an advantaged player, but for fun, you could if you wanted to!

What got me thinking along the lines of games and gamesmanship today?

It had to be the price action with Wallbridge (WM, TSX) and Balmoral (BAR, TSX)!  Both were up 20% yesterday and pushed a little higher today.

With stocks, especially on a shorter-term basis, you’re playing the other players more so than you’re playing XYZ and ABC.  Most of the games being played, if any, are psychological games.  An advantaged player’s goal would be to accumulate a stock, then distribute it to someone else, at the best price possible. Everything in between – news, rumors, fear, greed, volatility, etc. – is gamesmanship to a certain extent, much of it meaningless though in terms of how it impacts the underlying value of the business longer term.

Case in point – on November 29 we learned about Kirkland Lake’s (KL, TSX, NYSE) plan to acquire Detour.  Weighing in at nearly $5 billion, this announcement was a BIG DEAL and it promised to be a game changer for 2 explorers active within the belt.  Ever the games man, Mr. Market sussed the information out ahead of time.  BAR gained like 50% before everyone fully understood what was driving the move, but it’s easy to see why:

Wallbridge, having already published “world class” drill results, wasn’t as positively impacted as BAR, but it also continued rallying after learning Kirkland was moving in!

BAR and WM had fantastic runs before and after the news.  But at a certain point price action has to pause.  There’s a certain point where enough is enough and it becomes a waiting game.

An element of doubt, about whether or not the deal would close, was even introduced at one point along the way and that seemed to cause some weakening in price (possibly some gamesmanship there).  So after hitting a short-term peak, BAR and WM traded down by approximately 33% and 25% during the month of January.

Were games being played?

I don’t think so, not really.  If there was a game to be played at all it would’ve been the patience game, either a person decides to be patient and let this SLDZ area play evolve or you get out and come back later (maybe never).

After rallying for 6 months (BAR) and more than a year straight (WM) the stocks paused for 1 month, that’s it.  Now that the KL deal is finalized, Mr. Market starts looking to what’s next.  And anyone who read Kirkland’s press releases knew they promised to expand the mill and spend a bunch more money on exploration, obviously positives for BAR and WM (like we said last week, upon closing it would be a “green light” for these stocks).

Bottom Line: Wallbridge puts out more world class results (did anyone think they would never do that again?) and Balmoral, the dominant landholder in the belt rises in sympathy.  Anybody who owns BAR and/or WM couldn’t have asked for a better neighbor in the world than Kirkland, real estate values just went up!  Times get more exciting because Kirkland will be such an active force on the exploration, development, and possibly on the M&A front going forward.