Would You Go "All In" With Your Portfolio?

Hardly a month after the conclusion of the 2006 World Series of Poker, $12 million main event winner Jamie Gold is at it again. This time, he's leading a tournament that's headlined by poker legend Johnny Chan in the Turks & Caicos Islands.

That's unbelievably impressive, of course. So why, then, can't I stop thinking of Chris Moneymaker? Probably because of the way he won the 2003 tournament, thanks to a hand that has become known simply as "the bluff."

A Rule Breaking bet
Moneymaker was heads-up at the end of the main event with veteran pro Sam Farha. About halfway through their duel, Moneymaker was dealt the four and seven of spades -- a speculative hand that you'd typically prefer to play against a lot of opponents. Farha does better, picking up an unsuited king and nine. When the first three cards -- "the flop" -- come two-nine-six with only one spade, Farha has the top pair and second-best kicker. That's a strong heads-up hand. Moneymaker has nothing. He needs either two running spades to make a flush, or two running low cards for a straight. He's a long shot, at best.

Predictably, Farha bets. Moneymaker has a big chip lead and thus calls. Silly? Maybe, but 19 of the remaining 47 cards can materially improve his hand. (That is, any spade plus the non-spade fives, eights, and 10s.) He gets one of them with the next card: the eight of spades. Suddenly, he has a huge hand -- good draws to both a flush and a straight. Farha, however, still leads and bets $300,000. Moneymaker raises $800,000, which appears to be about one-third of the chips remaining in Farha's stack. He calls, correctly figuring he still has the best hand. What happens next, however, is the stuff of legend.

The final card is a completely harmless three of hearts. Moneymaker now officially has nothing. First to act, Farha checks. But Moneymaker bets it all. After deliberating for several excruciating minutes, Farha folds. It was the turning point of the event and led to Moneymaker's $2.5 million victory.

Crazy?How about crazy like a fox
We simply have no way of knowing what Farha was thinking when he laid down the best hand, nor can we know what Moneymaker was thinking with the all-in bet. But it would be simply wrong to conclude that the affair was a matter of feel. Sure, that played a part, but so did the situation.

The point is this: There were dozens of ways for Moneymaker to analyze his position and, especially after the fourth card, his chances to win. It may not look like it on TV, but every great poker player -- especially the odds-calculating No Limit expert -- has an analytical side. And so does every Rule Breaker investor.

A science and an art
Failing to think through every profitable scenario can cost you at the poker table, and it can be equally costly in growth investing. For example, loading up on shares of NVE (Nasdaq: NVEC  ) , Honeywell International (NYSE: HON  ) , or Freescale Semiconductor (NYSE: FSL  ) because Magnetoresistive Random Access Memory, or MRAM, could be the "Next Big Thing" is not Rule Breaker investing. It's more like coin-flipping or, worse, lotto.

Growth investors, instead, imagine outcomes under which speculative stocks such as Chinese portal Baidu.com (Nasdaq: BIDU  ) or Web real estate assistant Move (Nasdaq: MOVE  ) would make enough moola to handsomely reward shareholders. Then, like Moneymaker, they calculate a price worth paying based on the odds of a payoff.

Short-stacked and all-in, but with lots of outs
Developing a valuation thesis for a growth stock is a lot like counting your "outs" -- that is, the cards that can improve your hand -- in poker. Often, they're hidden. Go back to Moneymaker's four and seven of spades. With two-nine-six on the flop and only one spade, most players would throw away that hand to any bet. They'd probably conclude they were too far behind. And they'd be right from the standpoint of immediate outs. The three remaining fours and sevens probably wouldn't help much. But this is also very short-term thinking, particularly when it doesn't cost much to see another card.

Now consider iRobot. The maker of the Roomba robot vacuum and Scooba robot floor scrubber is down nearly 37% since joining the Motley Fool Rule Breakers portfolio in December. And the company still faces considerable criticism; nearly 14% of its shares are sold short. Those betting against iRobot must figure that the Roomba and Scooba are simply a novelty and that defense contractors such as General Dynamics (NYSE: GD  ) and Northrop Grumman (NYSE: NOC  ) will overrun its budding military business.

Well, they could be right. But that's hard to imagine with the number of outs available to iRobot. First, insiders own a massive amount (57%) of shares, which I consider to be a remarkable statement of faith in the underlying business. Second, the company has broadened its line of cleaner bots with a new model for tidying up garages and workshop areas. And, finally, with growth soaring past 30% and margins expected to expand into the mid-teens, iRobot's valuation is at worst reasonable and could even be cheap.

In sum: For every reason the shorts have to be short, there's a lucrative reason to be long. That's why iRobot is an active recommendation of the Rule Breakers service.

Go all in
Like No-Limit Hold 'Em, Rule Breaker investing is for the advanced student who isn't afraid of some volatility in his or her holdings. It's demanding, but it can also be richly rewarding. Just ask Rule Breakers lead analyst David Gardner. Many of his earliest bets paid off in multibagger fashion. Now the current Rule Breakers portfolio has found four more in the first two years of the service. Find out what they are with 30 days of free access. There's no ante and no obligation. Click here to be dealt into the game now.

This article was originally published on August 12, 2005. It has been updated.

Fool contributor Tim Beyers never check-raises the flop, only the turn. And if you believe that, you're invited to play poker with him. Tim didn't own shares in any of the stocks mentioned in this story at the time of publication. Get the skinny on all of Tim's stock holdings by checking his Fool profile.The Motley Fool's disclosure policy is aces, baby.


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