Investing Lessons From The Duchess Of Poker, Annie Duke, Plus Five Names To Hold

by: John P. Reese

There are investing lessons to be gleaned from the decision-making strategies used in gambling, says legendary poker player Annie Duke in her new book.

Getting use to filtering out "noisy data" and focusing in on the facts that matter can improve your chances of winning the investing game in the long run.

We pinpoint five names that rank highly based on quantitative models inspired by great investors, including Warren Buffett, Peter Lynch, James O'Shaughnessy, and Kenneth Fisher.

Is investing in the stock market the same as gambling? Are we betting the odds when we purchase a piece of a company, playing a version of capitalist casino, rolling the proverbial dice?

It really all depends on your mindset about investing and your approach to making decisions. In his famous book The Intelligent Investor, the late Benjamin Graham wrote, "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

But there are investing lessons to be gleaned from the decision-making strategies used in gambling, says legendary poker player Annie Duke in her new book, Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts. In a recent podcast interview with Bloomberg, Duke—who retired from poker in 2012—explains how "getting used to dealing with noisy data" can serve you well in both.

Duke studied cognitive science and was pursuing a doctorate before becoming a professional poker player in 1994. Her academic background, she said in the Bloomberg interview, probably gave her an edge in poker because cognitive science studies "how people think, learn and how they are biased in how they process information." But Duke says that her potential as a card player probably developed well before college, at the family dinner table. Those discussions, Duke recalls, were "focused on getting to the truth rather than making everyone feel good about themselves," an environment that made her adept at hearing dissenting points of view. "It's incredibly good training for poker," Duke argues, and a great foundation for all types of decision-making.

Why? Duke asserts that if you approach the world from the standpoint that you want to be right, then you're going to use any and all information to support your thesis and "swat away" information that runs counter to it. "Our decisions," she says, "will suffer for it." If, on the other hand, you stay focused on finding facts, dissenting views are no longer threatening and can help you make better decisions.

This is an approach that the late Ben Graham certainly espoused, and one that his devoted disciple Warren Buffett still does—to gauge a stock's appeal by focusing on facts and a company's fundamentals, not by paying attention to market noise and buzz. By focusing on process rather than outcome, on fundamentals rather than headlines, an active investor stands a much better chance for success over the long term. A disciplined strategy and unwavering approach may not win every hand--but can lead to long-term victory.

I have created stock screening models that mimic the strategies of some of the most successful investors of our time, including Warren Buffett, Peter Lynch, James O'Shaughnessy, and Kenneth Fisher. These models assign scores based solely on business fundamentals and concrete metrics and allow investors to build portfolios that are aligned with their specific needs and risk profiles. The following names all earn high marks from at least four of these models:

Toll Brothers Inc. (NYSE:TOL) is engaged in designing, building and selling detached and attached homes in luxury residential communities. The company earns a perfect score from our O'Shaughnessy-based model and high marks from several other screens based on its consistent growth in earnings-per-share, price-earnings ratio (13.05), free cash flow and quarterly revenue growth.

Thor Industries, Inc. (NYSE:THO) manufactures a range of recreational vehicles in the U.S. that it sells primarily in the U.S. and Canada. The company earns a perfect score from three of our guru-inspired stock screening models due to its persistent EPS growth, price-sales ratio, leverage (debt-equity ratio of 4.58%), earnings yield and return-on-capital.

Koninklijke Ahold Delhaize NV (OTCQX:ADRNY) is a retail store operator in Europe and the U.S. (U.S. brands include Stop & Shop, Peapod, Food Lion and Hannaford). The company scores well according to several guru strategies in light of dividend yield (3.44%), earnings growth, and price-earnings ratio (12.51, versus the market P/E of 29.00). The price-sales ratio (a key metric in our Fisher-based screen) of 0.36 adds appeal.

ManpowerGroup Inc. (NYSE:MAN) provides workforce solutions and services and scores well due to its persistent growth in earnings-per-share, price-sales ratio (0.4), earnings yield (9.97%) and return-on-total capital. The stock's price performance (measured by relative strength) adds appeal.

D.R. Horton Inc. (NYSE:DHI) is a homebuilding company that passes of our guru screens in light of both annual and quarterly revenue growth, earnings persistence, price-earnings ratio (14.96) and price-sales ratio (1.15).

Repsol SA (OTCQX:REPYY) is an integrated energy company that scores highly based on its ratio of price-earnings to growth in earnings-per-share (PEG ratio, a hallmark of our Peter Lynch-inspired strategy) of 0.41 as well as its cash flow-per-share and number of shares outstanding (1.5 million shares, versus the market average of 614 million).

Disclosure: I am/we are long TOL, THO, MAN & DHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.