Portfolio Lessons from Pokémon Go

Posted on July 22, 2016

Author Name By Troy Brown, CFA

Typically, a blog should be topical when written, but if you want to stand out among the electronic onslaught of media coverage, one must avoid being an “also-ran” on well-trodden topics, or at least take a fresh angle. The following is my take on an over-covered topic with a pivot to a subject I originally assumed would get much less press.

As the second quarter came to a close, the United Kingdom’s referendum vote to leave the European Union (EU), AKA “Brexit”, dominated the news. While Britain’s eventual exit from the EU and its impact on the future economic landscape is, at a minimum, more than two years away, the world’s financial markets swooned over two very uncomfortable days. As responsible advisors, our firm issued an immediate statement to our clients informing them we would assess ongoing developments and provide future guidance, but that no action was recommended at this time. As expected, everyone else in the financial industry had a Brexit comment as well. In fact, although I have committed to reading and/or listening to at least one Brexit recap each day, my backlog of material is voluminous.

The above “was” my introduction, but the barrage of Brexit coverage sentenced any blog entry on this topic to be largely ignored and lost in the shuffle. However, an event during the first week of July gave me a chance to pivot to a new topic I was sure I could tackle without much competition in coverage. Boy, was I wrong…but here it goes anyway!

Pokémon Go is a new augmented reality game you play on your smartphone. If you don’t know what I’m referring to, please stop reading now, because I love the game and am about to go deep in order to stretch a few parallels related to building successful investment portfolios.

The Pokéstop (Collaboration): It is commonly said that, of 10,000 planes, no one talks about the 9,999 planes that land safely — only the one that crashes. While Pokémon Go’s early days have been marked by system crashes and a few felonious incidents, the game has also created a magical fellowship around Pokéstops (floating blue squares within the game, to the uninitiated). This is where people gather to share information and obtain items to advance in the game. Like any successful client portfolio, common goals of collaboration, education, and trust are critical to success. The lesson here is that, while you can certainly go at it alone, you may be inviting unintended consequences. There is strength in numbers.

The Pokédex (Portfolio Construction): Like I said in the introduction, I’m really stretching for this one, but Pokémon Go, like building investment portfolios, is centered on choices. Portfolio capital (Pokéballs) is finite – one choice is to build a diverse portfolio with traditional investments (see Pokémon types: Rattata, Pidgey, Zubat, etc.) with reasonable costs (one Pokéball toss). However, in a low return environment, a portfolio of traditional investments may not meet future objectives (taking over a Pokémon Gym). To increase the probability of meeting objectives, investors should consider seeking out attractive opportunities (chasing down a rare Pokémon, such as a Vaporeon) to increase the probability of success. Understanding these opportunities and how they fit into your portfolio requires additional analysis, patience, and invariably higher costs (many, many Pokéball tosses and probably a few Razz Berries) in exchange for their greater potential rewards.

Gotta Catch’em All (Assessing Investment Opportunities): While I am an avid player in heated competition with my daughter to seek out and catch them all, as an investor, should you follow the herd, chasing after every opportunity just so you can sit at the investment “cool kids” lunch table? I am relating this choice to the reoccurring phenomenon of the “investment craze” (anyone remember 130/30?). The fact is, conferences and marketers will always position what can be effectively sold (Pokémon Go’s sales pitch – it’s free… mostly). This natural order creates an ebb and flow for what’s hot at any given point in the investment world. Filtering real opportunities from the latest fad is work. Unless you dedicate the time to understand the opportunity and how it impacts the rest of your portfolio, I would recommend avoiding it all together. There is no silver bullet.