Poker champ's view on diversification
This weekend’s Barron’s magazine ran an interesting article about Annie Duke, a world champion poker player. Annie now provides consulting and coaching services to managers in the financial services industry. Her insights into risk management under uncertainty can be extremely valuable. I found it really interesting when asked what she did with her money in this most recent financial crisis, her response was “nothing, on purpose…..I kept my 65% equity, 35% fixed income allocation.” She went on to explain that, as with winning in poker, one has to understand where and when one can “outthink” other people. She understands that if you don’t believe you have special expertise or can outthink the other guy, in this case the market, you are much better off playing a “hand” you know will work. In this case, Annie is making a reasoned “bet” that her 65-35 portfolio has the highest “payoff” probability over time, rather than trying to time the market which we know has a very low payoff probability.