What can we learn from Snakes & Ladders ?
As a child I had played this wonderful game several times, especially on Maha Sivarathiri, when we had to spend the night awake. Little I did know that I am learning the game of stock market then !
If you ask anyone what game comes to their mind when some one say stock market, pat would come reply – Monopoly. Just because money is involved, many of us assume stock market is like Monopoly game. It is not correct. Monopoly is more like running a business. I strongly think Snakes and Ladders depict Stock Market situation.
I am sure many of us would have played this game as child.
For those who are new to this game, these are the rules:
All players keep their token at number 1 in the beginning. First one to get to square # 100 wins the game.
Only one dice is used for roll. You must roll number #1 or #6 to leave the #1 square and move on to the game. Until you get #1 or #6, you stay in the square #1.
You move square by square to the count you roll. ( For example, if you roll #3, you move 3 squares). If the square you land has snake or ladder, do as below:
Snake: if a player lands at the tip of the snake’s head, his or her token slides down to the square at the snake’s tail.
Ladder: if a player lands on a square that is at the base of a ladder, his or her token moves to the square at the top of the ladder and continues from there.
First player reaching the square #100 is the winner. You should reach #100 exactly, none more, and none less. You skip your turn if you don’t get exact roll to reach #100.
What does this game teach Stock Market Investor ?
First it teaches about the risk and reward. Risk is like the snake and Reward is like the ladder. While dice is in your hand, the outcome is not !
In the same way, in stock market, the investor can control the risk, but the reward ( or portfolio return) can’t be predicted.
When a single roll can decide between ladder and snake, players get tensed up.
For example, in the board in the figure-2, if a player is at square #75, he can roll 2 and move to #77 and catch the ladder to end up in #95 OR roll 5, and get to #80 and catch the snake with nasty smile, to get all the way down to #2.
Facing this situation, I see children praying to all kind of Gods, before rolling the dice. They are not praying for Ladder, they are praying for the Snake not to catch them. Same goes for the stock investor.
In real life stock market the risk and rewards are not as clear as this board game. Nevertheless we pray to God when the risks are too high for our tolerance.
Smart players of this game know that catching ladder is not as important as missing the snakes. Since roll of dice always push you forward you tend to move up slowly, you will get to the target anyway, just avoid snake heads.
Like wise, Stock Market has upward bias. Smart investors know time is on their side, and helps them in getting compounded return, if they just hang on in the market ! Important lesson for the investor is missing snakes or missing the downside of the market. I am not talking about timing the market. But investor should learn to control the risk of the portfolio so much that they don’t get to lose the capital or large negative return in any year. Just like avoiding snake heads !
Any one looking at the figure-2 closely will see most dangerous snake is the Green one that has its head in #99. That can drag you down to #7. I saw kids caught by this snake throw their token and quit the game in disgust. Some of them so much frustrated, vouch not to play this game again ! But kids have short memory and within 24 hours, they will return to play – eager to take revenge on the snake.
But we grownups have problem. We have good memory. “Once bitten twice shy” is written with us in mind, and not the children.
A retiree saving and investing his portfolio should take enough precaution to safe guard his assets and slowly shift the money to safe fixed income instruments just before retirement. This is very much necessary. Investors risk tolerance does not matter in this case. They MUST do this adjustment to the portfolio couple of years before the retirement.
After all, portfolio safety is what matters, investor’s risk tolerance is not, just before retirement. Remember Risk can show up unexpectedly. If the capital is destroyed completely, few years before withdrawal, risk tolerance of the investor, can’t get the capital back.
Any retiree who fail to do this adjustment due to ignorance or innocence or arrogance will taken down by the Green snake.
Another interesting square is #4. That ladder takes you to #79 in blink of an eye. A Lucky player rolling #3 at the beginning of the game tastes this success in one roll. It happens some time. The probability of getting 3 is only 16%. It is not impossible to get. Look at this other way, out of 6 players, one has the probability of getting this lucky roll ! Not a bad probability. This roll gives lot of confidence to the player and he starts thinking he in invincible on that day and assume he would be the winner because Lady Luck is playing for him !
The same thing happens in the stock market too. Few investors gets lucky and they make money quickly and that boost their ego and they attribute this luck to their stock picking ability and enter the stock market with lot of arrogance and they get humbled in few rolls.
Figure-3 is another version of the Snakes and Ladder Board.
If you take a look at it, you will immediately notice, all those long snakes and long ladders are missing in this board. But this also has 100 squares like any Snakes and Ladders game.
Is it meant for weak-hearted players ?
May be !
Like this board has a solution for certain people, if you are a weak hearted investors, do you have a special stock market for investing ?
There are few ways we can handle this situation.
(1) Adding enough bonds/fixed income into the portfolio reduces the volatility of portfolio return and reduce the variance. (2) Developed countries have better and transparent stock markets that are less volatile compared to emerging or developing countries. Investing in those markets also is one of the solution. (3) A combination of (1) and (2) also can be a solution.
At RRK Advisory we take a measure of our clients risk tolerance, before we recommend certain portfolio. Based on the risk measurements, we recommend suitable portfolio and monitor clients behavior with such portfolio. We adjust the mix based on the feedback that we get directly and indirectly from the client. [ Tip to Investment Advisors : One way of measuring risk tolerance of your clients, is to ask between the two Snakes and Ladder board, which one they are comfortable to play. Do they like to play with long ladders and long snakes or short ladders and short snakes ? This will tell more about the clients mindset ! ]
After all we have to make the investors sleep peacefully in the night !
Let us reserve the Maha Sivarathiri ( sleepless night) just for religious purpose and it should not happen due to our investment portfolio.