“Learn to ask of all actions, ‘Why are they doing that?’ Starting with your own.”
We have written in the past about our investment maxims. There are many ways to succeed at investing, but we remain guided by our simplifying principles and grounded in our consistent, disciplined approach. We were recently reminded of a fundamental maxim — the importance of flexibility — as we observed the success of Jeopardy! champion James Holzhauer. He earned over $2.4mln in 33 games and did so in a decidedly unconventional manner — developing his own unique strategy which almost no other contestants had implemented.
Be Flexible: Don’t Get Stuck with a Stale Playbook
Jeopardy! is a 55-year-old American game show that has aired over 8,000 episodes. It’s a quiz competition where three contestants play against one another over three rounds. A contestant chooses from a subject category, the gameshow host provides an answer (clue), and then any player can buzz in with the correct “question” that pertains to the clue. The first contestant to answer correctly gets to choose the next clue. Each of these clues is behind a dollar amount, and the amount reflects the difficulty of the clue. In the first round, $100 clues are the easiest and $500 ones are the hardest. An example: if someone chooses Pixar Movies for $100 and the clue is “Woody and Buzz’s first quest,” a contestant would then buzz in with, “What is Toy Story?”. This continues for two rounds, with the second round being called Double Jeopardy! as the dollar amounts go up 2x. During each of the first two rounds there are “Daily Doubles” hidden behind certain clues. When a contestant fortuitously selects a clue with a Daily Double, he or she can wager some (a minimum of $5) or all of his/her winnings on the answer. The game concludes with Final Jeopardy!, a round in which contestants are able to wager any/all of their winnings after receiving one final clue. At the end of each game, one triumphant contestant is awarded a cash prize equal to his or her total winnings ($19,980 is the champion’s average winnings since 2004). The champion is then asked to return for another episode, and the competition continues until he or she is defeated by a challenger.
Prior to James Holzhauer’s Jeopardy! debut, the game had been played with the same tactics by almost all contestants (around 14,000 people) over its 55-year lifespan. Players traditionally start by selecting the smallest values (easiest clues) and then work their way up, gaining confidence as they move towards the larger dollar figures (harder clues). When contestants land on a Daily Double, they usually wager a moderate amount (on average around $2,000, or 42% of their winnings), as these higher-reward opportunities tend to be paired with more difficult clues. In Final Jeopardy!, the three contestants’ winnings are typically separated by marginal amounts, making the strategy for final wagers an important calculation in determining who will be crowned champion.
James Holzhauer, a 35-year-old professional sports gambler from Nevada, challenged traditional Jeopardy! tactics by writing his own playbook for the game. He told NPR, “What I do that’s different than anyone who came before me is I will try to build the pot first.” In other words, James would start with the hardest clues and then work his way towards the easier ones. When he came across a Daily Double, he’d wager 4.5x the average player. By the end of the second round, James was usually already leading the other contestants by an average of $36,750, making it virtually impossible for them to win the game even if they wagered their entire pot in Final Jeopardy!. James called his style of play “strategically aggressive.” He averaged $77,000 in winnings per game – more than 4x what a typical contestant earned in a game over the prior 15 years. James’s innovative method helped him accumulate over $2.4mln during an incredible 33-episode run. Even after all this success, his methods caused a stir – an op-ed piece in the Washington Post called James a menace and a Variety article said he was bad for the show. The fact is, James discovered how to win unconventionally, which frustrated traditionalists who never questioned the status quo.
James made an analogy to the curious “sport” of competitive hot dog eating, noting, “About a decade ago, nobody ever thought someone could eat more than, like, 25 hot dogs in 10 minutes. But this guy named Takeru Kobayashi came along and he shattered the record by so much that people realized there was a new blueprint to do this.” All Kobayashi did was change the way he ate hot dogs. He would split them in half, dip the buns in water, and then stuff both parts in his mouth. We realize that studying competitive eating tactics is akin to watching CNBC for investment advice, as both activities are fairly useless. However, this does illustrate the value of questioning how/why things are done a certain way. James said this to Vulture about his prepping for Jeopardy!, “I look at every aspect and think, What can I do just a little bit better than the average person? It was finding a little bit of an edge in every aspect of the game I could.”
A portion of James’s success could indeed be attributed to his intellectual disposition. He became a math whiz at an early age, and at seven years old he was moved up to 5th grade. During college at the University of Illinois at Urbana (where he graduated with a Bachelor of Science in Mathematics), James memorized statistics for baseball and other sports. He loved weekly get-togethers with friends at a pub for Tuesday Night Trivia, and his group was often considered a trivia dream team. But, like James, most Jeopardy! contestants are highly intellectual individuals. In order to be chosen for the show, prospective players must pass a 15-minute online test. Around 100,000 people take the test every year, and those with the highest percentage of correct answers are placed into a pool of 3,000 or so potential contestants. Most Jeopardy! players make it onto the show by already knowing a lot of trivia. Any potential candidate can access and study over 250,00 clues that have been uploaded to a Jeopardy! fan website from archived shows. In fact, a Ph.D. computer scientist named Roger Craig, the highest single day Jeopardy! winner before James, downloaded all these clues and categorized them, providing himself with a database of what to study (history, geography and literature are examples of popular categories).
James didn’t succeed at Jeopardy! simply because he was smarter than all the other candidates. Rather, his unique strategic approach and custom playbook for the game gave him a competitive edge. He developed his playbook by remaining flexible and questioning the status quo, unlike many players before him who simply conformed without even understanding why.
James garnered some astounding statistics during his impressive Jeopardy! run:
- On 12 shows he never missed a single question.
- Over his 33-episode streak, he answered correctly 97% of the time – he only missed 36 clues out of the 1,222 he received.
- He answered his Daily Doubles correctly 71 out of 75 times.
- His Final Jeopardy! correct answer rate was 97%.
- His top single game winnings were $131,127, the highest in the history of the show.
Perhaps even more interesting than James’s success are the circumstances that led to his eventual loss. He was “beaten at his own game” by a midwestern librarian named Emma Boettcher, who had her own edge and playbook. Emma had written her master’s thesis for information science on the difficulty in predicting Jeopardy! clues. She said in an interview, “I was pretty well informed of my own abilities and knew where I could be confident and where I could be cautious.” She, too, played unconventionally against James and wagered her entire winnings on the first Daily Double (and got it right). Going into Final Jeopardy!, Emma had racked up $26,600, while James had $23,400 (the third contestant was not even in the race). The Final Jeopardy! category was Shakespeare — and what more could a librarian ask for? Even if James wagered his total winnings, his potential payoff was capped at $46,800. Meanwhile, Emma knew she would win by guessing correctly and betting more than $20,201, which she did. She dethroned the unconventional Jeopardy! king by playing unconventionally herself. Emma was presented with a category she knew well, she placed a sizable bet, and her victory was sealed.
The story of James and Emma is a nice parallel to how we think about investing. Many fundamental investors share a similar playbook for researching and analyzing companies during the fact-gathering stage of due diligence. They read the 10-Ks and 10-Qs, listen to conference calls, attend management meetings, visit with customers/competitors, and sift through troves of data available on the internet. Yet, the key to investment success often lies not in how much information one has, but rather in how that information gets used. In other words, what does our investment playbook call for given the information we currently have, and what action should we take if we uncover information that alters our thesis? How do we evolve our thinking as information changes? How do we get better at understanding and reacting to what the data is telling us?
Our opportunistic approach to investing requires us to apply flexible thinking in the same manner as James and Emma. Our analysis must never be static; instead, we should be anticipatory of change while always questioning the status quo and refining our investment process. We must appropriately size our investment positions (like a Jeopardy! wager), and it’s imperative that we have a well-reasoned thesis supported by data when we decide to act.
Why do we feel as though our approach to investing is considered unconventional? The current investing zeitgeist often suggests that compounding capital by actively investing in public businesses and owning them for long periods of time is boring. Regardless of how others view our approach, we will continue to manage your capital using a long-term mindset and a flexible playbook — one which will constantly be refined and improved over time.
Information contained herein has been obtained from sources believed reliable but is not necessarily complete. Accuracy is not guaranteed. Any views expressed are subject to change at any time, and Nixon Capital disclaims any responsibility to update such views. This information is not to be reproduced or redistributed to any other person without the prior consent of Nixon Capital LLC.