Investing the Poké Way

The recent virtual reality game Pokémon Go has taken the world by storm. Lots of people, from early twenties to late thirties, are staring at their phone on the streets like zombies in order to catch Pokémon. In addition to the creation of numerous business opportunities, there are a few things that an investor would like to learn from a Pokémon trainer. In the following, the commonalities between catching Pokémon’s and investing in the markets will be explored in details.

In my humble opinion, there are three things that investors can learn from Pokémon Trainers:

1. Go for the most valuable Pokémon’s.

Even though the motto of the game is “Gotta catch’em all!”, we all know that not all Pokémons are created equal. The truth is that trainers would rather focus their efforts in catching the strong and rare Pokémons, and passing the weak and common ones, because they want to make sure that the reward repay their effort.

This is the same in investing. Conventional wisdom in Wall Street suggests people to diversify in a lot of different companies, when in fact the best results could only be achieved by investing in a few companies which you believe in. The best investors are often very selective about which companies to buy. For example, when Market Wizard David Ryan talked about his mentor, William O’Neil, he said (Power, 2011):

“He’s the best at taking the entire market, focusing it and bringing it down to one stock. Taking the whole market, 7000 stocks, and finding out which one was going to be the absolute winner and then putting all his money into it and being hugely margined. He was always borrowing more money on a position; he bought more when his equity went up. He would really focus down on to that one stock and do very well off it. I’ve never seen anyone better able to put everything into just one stock.”

O’Neil himself also believes that diversification is a hedge against ignorance (O’Neil, 2009). He said, “The winning investor’s objective should be to have one or two big winners rather than dozens of very small profits.” Therefore, be selective in what you want to buy.

2. Throw your Pokéballs wisely.

It follow from the last point that, since not all Pokémon’s are created equal, it is wise to limit your use of Pokéballs on each Pokémon, so that you can save them for a more important Pokémon which may appear later. It is a sad thing that, when you have finally encountered that rare Pokémon after which you have been chasing for weeks, you just find out that you run out of Pokéballs.

This is the same in investing. While equally successful investors may have completely opposite methods of operation, one of the key ingredients of their success is prudent risk management. Many of them believe that the correct sizing of each position, along with the decisive management of the non-performers, is far more important than the actual entry and exit signals (e.g. Schwager, 1989, 1992). If you use up all the capital in the bad trades, you’ll never able to make it back when a good trade comes along. Therefore, always save your capital for another day if you are not doing well.

Blackjack master and expert options trader Blair Hull once opined that successful trading comes down to two things: getting an edge, so that you have a statistical chance to win; and stay long enough in the game, so to give the aforementioned edge enough trials to make a difference (Schwager, 1992). In the practice of investing, capital preservation is the name of the game.

3. Time your throw.

Following the last point: if every Pokéball counts, then it is not only important to save them for important uses, but to throw them accurately and carefully when each of them has to use them. In Pokémon Go, the player is required to time the throw of the Pokéball by watching the target ring over the Pokémon. His chance of catching the Pokémon is the greatest when the size of the target ring is the smallest.

When it comes to this, an investor is less lucky. He cannot exactly time the market to buy at the bottom and sell at the top. Moreover, depending on your system, you may buy and sell at different spots from other investors. Some like to bottom fish, while some like to buy breakouts to new high. It leads to some people believing that timing the market is impossible.

While it is not possible predict the exact turning points, it is possible to determine low risk entry points depending on your system. For example, if you are a trader of classical chart patterns who only places a trade when the price moves across a certain level, you shall always follow your system and only trade at those levels at which your system indicates as the lowest risk entries. The discipline to sit on your hands and only wait for the proper time to trade is the hallmark of a successful trader.

4. Keep trying

Finally, catching a Pokémon usually takes more than one throw for a successful capture. In the case of the stronger and rarer Pokémons, the wasting of a large number of balls is often required until the target is finally captured. It is the same in investing. Not everything that you touch will turn into gold, and you often run into mediocre choices that do not go anywhere. Nevertheless, you have to have the resolve to stick to the system, because one day you will finally have the chance to capture the massive trend that will pay for all your sweats and tears for a long time.

REFERENCES:

O’Neil, W. J. (2009). How to Make Money in Stocks: A Winning System in Good Times and Bad (4ᵗʰ edition). New York, NY: McGraw-Hill Education.
Power, B. (2011). Interview with Market Wizard David Ryan. Your Trading Edge. Jan/Feb 2012.
Schwager, J. D. (1989). Market Wizards: Interviews with America’s top stock traders. New York: HarperBusiness. Hoboken, NJ: John Wiley & Sons.
Schwager, J. D. (1992). The New Market Wizards: Conversations with America’s top stock traders. New York: HarperBusiness. Hoboken, NJ: John Wiley & Sons.