Nick Horob Profile picture
21 Feb, 27 tweets, 5 min read
1/25 Are you disappointed in your recent grain marketing? Here's an email I sent out on Friday turned into a thread.
2/25 After the wild and wacky stock market news recently regarding Gamestop and the Reddit crowd, I was glad to come across an interesting piece of research on investing and skill.

It's a piece written in 2013 from a team at Credit Suisse (Source @ end of thread) that states...
3/25 that there are two key aspects to successful investing: proficiency and choosing and attractive game.

The research starts out with this section:

"Jim Rutt, formerly both the chief executive officer of Network Solutions and chairman of the board at the Santa Fe Institute...
4/25....recently gave a talk about his experience in business.

He mentioned that he played a lot of poker when he was young, became pretty good at it, and made some money.
5/25 Rutt assumed that the best way to ensure continued success was to improve his skill, so he worked diligently at honing his game by learning the probabilities for each hand and studying other players for clues about the strength of their position. At that point...
6/25 uncle pulled him aside and doled out some advice. “Jim, I wouldn’t spend my time getting better,” he advised, “I’d spend my time finding weak games.”"

I [Nick] really like the poker analogy here! The authors dive deeper into what they mean...
7/25 Success in investing has two aspects. The first is skill, which requires you to be technically proficient. Technical skills include the ability to find mispriced securities (based on capabilities in modeling, financial statement analysis, competitive strategy analysis....
8/25 ...and valuation all while sidestepping behavioral biases) and a good framework for portfolio construction.

The second aspect is the game in which you choose to compete. Some games are highly competitive and others are not.
9/25 You want to find games where your skill is greater than that of the other players.

Your absolute skill is not what matters; it’s your relative skill.
10/25 Think about it this way. Say I invited you over to my house to play poker on Saturday night—and that you like to win. Your first question should be, “Who else will be there?” If I tell you that there will be some players that are as skilled as you and a couple of rich...
11/25 ...If I tell you that there will be some players that are as skilled as you and a couple of rich players who don’t play well your response should be: “I’ll be right over.” Why? While you know the amount of money entering the house at the beginning of the evening...
12/25 ...and leaving at the end of the night is the same, you can see how your gain will come at the expense of the weaker players. On the other hand, if I tell you that the players expected that evening have skill that is equivalent to yours, the response should be:...
13/25 “No thanks, I’m busy.” In this case, there’s no reason to believe that you will come out a winner because there is no mismatch in relative skill. And if you find yourself in a game unsure of which players are weak or strong, learn a lesson from Warren Buffett...
14/25 ...“If you’ve been in the game 30 minutes and you don't know who the patsy is, you’re the patsy.”
15/25 In cases where two or more players have the same level of skill—whether that skill is high or low doesn’t matter—the skills of the players offset one another and luck becomes the primary determinant of the outcome.
16/25 “Players” can be athletes, investors, or business executives. In many competitive realms, including investing, the skills of the participants have improved on an absolute basis but have shrunk on a relative basis. Today’s investor has vastly more resources....
17/25 ... and training than his or her predecessor from years past. The problem is that investors, broadly speaking, have gotten much better which means that the difference between the skill of the best and the average participant isn’t as great as it used to be."
18/25 You're likely asking what this has to do with farming and that's a good question. Let me share with you a story.

I recently talked to a friend who farms. I could tell he was angry about something.

He told me that he really needs help with his grain marketing.
19/25 I asked for some background and he stated that he sold "too much" of his 2020 crop earlier at lower prices. I then asked "how did 2020 turn out for you as a whole?". He stated that it was one of the best farming years he's had financially.
20/25 I then asked about what "wins" he's had on his farm and he stated that he's had really good luck with doing some variable rate on his inputs as well as...
21/25 ...working with landlords on creative drain tile arrangements.

I told him he's worrying too much about the "wrong game"!
22/25 If your definition of wining the grain marketing game is to always beat the market, then you're going to be in for a lot of outcomes that feel like losses.

If you choose to be a proactive seller of your crops, years where we see unexpected and strong rallies...
23/25 ...are going to make you feel like you're in the wrong.

That's simply the nature of farming. I told him that every few years his proactive grain marketing decision making was going to feel like a mistake but that's the opportunity cost...
24/25 ...of managing the downside risk on his farm. This risk management can greatly reduce risk of ruin which can take you out of the farming business altogether.

Rather than fixating on the the hindsight of his grain marketing....
25/25 ...he should focus on the "games" where he has more the VR and tile that he mentioned to me previously.

[I can't post any more to this thread so I've attached a picture with the ending of the email]
Ht @MatthewFord01 for the idea on this one!

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