photo by Flickr user markstarlite
Investors can learn more from a 35-year-old game show than they might think.
My family watches “Jeopardy!” almost every night. We even record the show so we can go back and catch up on any episodes we have to miss. While “Jeopardy!” fans typically skew older, my Generation X husband and my millennial self both enjoy strengthening our brains five times a week.
Recently, the rest of the country joined us on the trivia train. James Holzhauer, a professional sports gambler from Las Vegas, took the game by storm starting in early April. Some observers went so far as to say he broke the game in its 35th year on the air. On June 3, Holzhauer’s reign ended after 32 wins. He amassed total winnings of $2,462,216 – less than $60,000 shy of Ken Jennings’s record, which Jennings achieved in 74 games. During his time on “Jeopardy!”, Holzhauer amassed the top 16 single-day high scores; his highest daily score, from April 17, was $131,127. “Jeopardy!” ratings soared during Holzhauer’s run, with the show ranking No. 1 in homes for 29 of 33 of his games. His final show brought “Jeopardy!” its highest ratings in 14 years.
How was Holzhauer so successful during his run? Not only did he win; he dominated the games. Only three of Holzhauer’s 33 games (including the one he lost) were not runaways going into Final Jeopardy. While not downplaying his powerful knowledge base – he answered 97% of clues correctly – Holzhauer’s dominance came in part from his unusual and aggressive strategy.
Holzhauer played his game much like a poker tournament. He concentrated on amassing as much money as possible as quickly as he could, so he would have more to bet with when he hit on the Daily Doubles. Whereas the common “Jeopardy!” strategy is to start at the top of the board, which offers easier questions, Holzhauer started with the clues worth the highest dollar amounts. His vast knowledge also assured that he would retain command of the board.
When he landed on the Daily Doubles, Holzhauer made large wagers. It was not uncommon for him to “go all in” on the Daily Double in the Jeopardy round. He risked large amounts, often based on a date with personal importance: his daughter’s birthdate ($11,914), his wedding anniversary ($9,812), or the date of the mass shooting in Las Vegas to honor the victims and the organization Vegas Strong ($10,117). Since he typically passed his opponents’ reach by Final Jeopardy, Holzhauer could feel comfortable placing a large wager. Even if he didn’t answer correctly, he would merely reduce his payout without surrendering the game.
Holzhauer’s occupation contributed to his success, even though “Jeopardy!” isn’t principally a game of chance. As a professional bettor, Holzhauer had experience making large wagers. He is at ease with being aggressive and unafraid to take risks. In a New York Times article, Holzhauer explained why he thought other players weren’t more aggressive. “You have to be comfortable,” he said. “Some of the opponents I’ve been playing, you can see they are visibly shaken by what’s going on onstage. Of course, you’re not going to play well if you’re up there trembling.” Holzhauer added: “No. 1 is making sure you’re in your comfort zone.” He credits his occupation with his willingness to wager larger amounts than the average contestant.
Holzhauer also has said he believes that the traditional way of playing “Jeopardy!” is too risk averse. In his view, contestants often are too concerned about losing money to make a large bet when they have the chance. For instance, a contestant who lands on a Daily Double in the $2,000 row in the Double Jeopardy round will often bet only $2,000, or an even lower amount. They are so worried that they will get the question wrong – whether because they don’t feel confident in their abilities in the category or because they feel uncomfortable with risk – that they don’t take advantage of their chance to pull ahead in the game. Similarly, when a contestant plays well enough for the game to be a runaway going into Final Jeopardy, he or she will often wager $0, rather than wagering enough to beat the next contestant by $1 in case of an incorrect answer. Even if the leading player gets the Final Jeopardy clue wrong, he or she will still return to play another game. If the contestant answers correctly, he or she will win a considerable extra sum.
Most of us will never appear on “Jeopardy!”, but risk aversion can have real costs outside of game shows. My colleagues and I find that many new and prospective clients at Palisades Hudson are also too risk averse when it comes to financial decisions. Some are so afraid of losing their savings in the stock market that they keep all their money in a low-yield savings account. This is almost like keeping their money stashed under the mattress. The annual interest rate on these accounts is typically so low that their savings will barely grow from year to year. Not only are these savers forgoing earnings, but they are vulnerable to inflation eating away at their spending power in the future.
After we engage new clients, we discuss potential asset allocation plans, which we customize to their risk tolerance and needs. For younger clients, we often suggest a slightly riskier allocation, in which they hold a higher percentage of stocks and a lower percentage of cash and bonds. For clients who are older and closer to retirement, we advise a more conservative allocation, in which they hold a higher percentage of cash and bonds, and a lower percentage of stocks. Even for the most risk-averse clients, we encourage at least some exposure to the stock market to preserve earning power. In all cases, we ensure that clients have a diversified portfolio built on well-researched funds. We also rebalance their accounts as needed to keep their chosen allocation on target. In this way, we help clients stay in their comfort zone, like Holzhauer, regardless of market conditions.
Holzhauer’s long run on “Jeopardy!” illustrates the success that can result from a healthy risk tolerance and an unemotional approach to strategy. While many viewers did not understand Holzhauer’s proclivity for high wagers, his bets were always calculated and suited his risk standards. Holzhauer’s occupation led him to be less risk averse than most players, and his bold strategy turned a 35-year-old game on its head.
If there is anything to learn from Holzhauer’s performance, taking bold yet calculated risks can pay dividends. Investors should take note.