The Game Beyond the Game

“Man, money aint’t got no owners, only spenders.” – Omar Little

Successful investors have some combination of the following:

  • Analytical firepower
  • Math skills
  • The correct temperament
  • A deep understanding of human psychology
  • The right amount of self-doubt
  • A high level of emotional intelligence
  • The ability to think in terms of probabilities
  • The discipline to follow a well-thought-out investment process

For those working in the financial industry or managing money for other people, the final piece of the puzzle is having the ability to effectively communicate your thoughts, ideas and philosophy in a way that others can understand. Even the most intelligent of investors won’t last long managing other people’s money if they’re unable to articulate what they’re doing and why.

I’ve witnessed plenty of brilliant investors over the years who were unable to gain or retain clients because they couldn’t relay their message properly. Distilling complex ideas into simple terminology is a highly underrated skill. If you’re able to sell yourself or your ideas you can go a long way in finance (or most industries for that matter).

For this reason, I’m always on the lookout for new or better ways to explain the most important concepts people need to understand. I find making complex topics relatable in the form of stories or analogies is a useful way to explain finance so people can actually grasp the information.

I recently read the book The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Harvard professor Mihir Desai that puts a different spin on many well-worn subjects in finance. Desai uses classic literature, philosophy, movies and history to provide a different perspective on a wide variety of financial subjects.

I’m a sucker for pop culture analogies which is one of the reasons I enjoyed this book. My favorite one was a discussion about the old HBO show The Wire. This show is in the conversation when people discuss the greatest TV shows of all-time. The final season was underwhelming but the first four were right up there with the best shows ever.

Desai uses The Wire to explain diversification, a concept that’s near and dear to my heart:

The use of diversification to mitigate risks runs through to today and appears in unlikely settings. Stringer Bell, the business mastermind of the Barksdale Organization in the television show The Wire, employed diversification as a method of risk management. In his cat-and-mouse game with the police, protecting communication was critical, so he used temporary “burner” cell phones. But Bell went further than simply not relying on one phone line to avoid detection — he ensured that the purchases of burner cell phones were spread across multiple stores so that no clerk would remember a large sale, and he also used multiple SIM cards. His critical risk — detection and monitoring by the police — could be avoided by diversification.

More broadly, his ultimate aim, partially realized, was to diversify beyond drug trade into real estate and federal contracts, looking for a “game beyond the game.” Ultimately, his entire criminal organization is undone because the Barksdale employee who so carefully diversified his burner cell phone purchases failed to diversify where he rented cars from. The use of the same rental car agency again and again is the wedge the police use to break the gang, which leads to Bell’s downfall. From medieval agriculture to the techniques of drug dealers, diversification has been a powerful way to manage risk.

I love this example because it shows how risk management has to be a multi-faceted endeavor to work correctly. Stringer Bell didn’t have all his bases covered but that’s probably because he was far too overconfident (It also didn’t help that he had Omar coming after him).

Diversification alone is never enough to protect you from all risks but it can shield you from one of the biggest risks we all face — our own ignorance.

The late-Peter Bernstein once wrote, “Diversification is the only rational deployment of our ignorance.”

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return

Further Reading:
It Is Always the Same Novel