It is interesting how having a multi disciplinary approach helps you in your Investing career.
**Any career to be honest, in Investing world, it is more of a requisite than choice, elsewhere you pay by slower growth, stagnancy, In war you pay by your blood and life and in Investing/trading, you pay by parting ways with your money (Raw material).***
There are some interesting similarities between POKER, CHESS and Investing. (google it, there are couple of very interesting podcasts on the subject) The reason of similarities is that all 03 of them involve taking decisions based on insufficient information. (Actually NOT CHESS, if you are an international grand master, you can pretty much calculate and nullify the insufficient information, but yes the CHESS you and I play, there is a lot of Randomness and insufficient info.)
I thought of running a thought experiment of applying this POKER thinking on the concept of Promoter buying its own shares.
We have heard that if a Promoter is buying his own shares, it is good, isn’t it but if you look at the picture as a Poker hand, 03 scenarios show up.
To work on this concept, let us draw a hypothesis that buying his own shares is equivalent to raising the stakes, or betting big on every hand (there are 5 cards that show up in poker, every addition gives you an opportunity to raise)
He has got a BAD hand (Horrible business, Dim future) and he is bluffing his way out of the situation. Betting big on every hand so everyone else folds. Usually nobody would fight an over confident prick, unless he is totally sure of the bluff. This is your typical pump and dump scheme.
He is an idiot. He thinks, he has got an above average hand and whereas in reality its just about average. (trying to go all in with 03 of a kind) In business, this can be a case of Over confidence bias, or adrenaline pump due to previous success, a credit cycle that has gone in your favor and you start thinking yourself to be invincible.
He has got 04 of a kind. He is a savvy investor and knows that he has got an incredibly awesome hand. (bright future, solid business) and without showing any over excitement, he wants to bet as much as possible to get the maximum juice out of a sure shot thing.
Now, As an investor/trader, you need to assign probability to which of the 03 scenarios is playing out and based on your calculation decide if this insider buying is actually a positive, negative or neutral event.
Comments are welcome.