What Does Being Good at Wordle Have to Do with Managing Capital?

The Game of Wordle and its Parallels to Investment Management

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Wordle, the popular word-guessing game, offers a unique perspective on individual decision-making and has parallels for portfolio managers (CIO) and analysts.  If you embark on any endeavor, you can think of it in two parts: the process and the outcome. In Wordle, players have two primary metrics for success - the number of guesses it takes to find the correct word (Outcome) and how effectively they eliminate wrong possibilities (Process).  

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Upon completing the game, players receive two scores: the number of guesses it took to identify the word (ranging from 0 to 6) and a rating that reflects how closely their guesses align with an optimal algorithm (from 0 to 99). This dual scoring system provides insightful distinctions between those who prioritize process and those who focus on outcomes.

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For instance, sometimes you get lucky and guess the correct word in two attempts. Other times, carefully calculated guesses don't pay off immediately but steadily narrow your options. But over many rounds, it becomes clear that consistently applying a process beats random lucky outcomes. Sound like investing? Let’s take a closer look.

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An Illustrative Example from Wordle

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Consider this scenario: your first guess is SLATE, a word that reveals the letter A in the correct position but does not provide any other correct letters. Your next guess is CRACK, and miraculously, you get it right. You achieved the goal in just two guesses. While a score of 2 is impressive, it doesn’t necessarily reflect an optimal process. The word CRACK, despite being successful in this instance, does not eliminate many other possibilities, suggesting that it was not the most strategic choice.

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An optimal process would involve selecting words like PRICK or CRONY for the second guess. These words might offer a 0% chance of guessing the correct word immediately, but they would significantly narrow down the possibilities by eliminating many incorrect options. This approach aligns more closely with the optimal algorithm, which aims to minimize the number of guesses required over many games rather than focusing on individual successes. Over multiple games, the process wins over short-term luck.

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Process Beats Luck in Portfolio Construction: A Critical Insight for All Fundamental Investors

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There's a common misconception in investing that success hinges exclusively on picking the right stocks as portfolio construction takes the back seat. While strong security selection is essential, the reality is your long-term investment performance significantly depends on your position sizing, or how much capital you allocate to each investment.

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Just like true mastery of Wordle lies in developing a consistent, optimal strategy that may not always yield the fewest guesses, a good investment process puts calculated, systematic decision-making above the emotion of a great idea. This approach is not always obvious and requires a willingness to prioritize long-term gains over short-term wins in both Wordle and the financial markets. That concept is what we hope to simplify for fundamental fund managers with the Alpha Theory platform.

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Alpha Theory: Bringing Structured Discipline to Your Investment Process

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At Alpha Theory, we've spent decades helping portfolio managers adopt the "optimal Wordle player mindset” over the persistent gravity of gutfeel & ad-hoc decisions. Our platform translates your qualitative analysis into a systematic and repeatable position sizing strategy, drastically reducing guesswork and enhancing transparency. We make it natural to follow a sound process and help you keep sizing as close to optimal as possible, for the long term.

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We believe your investment edge that stems from your research should translate directly into your portfolio performance. Just like a seasoned Wordle player, disciplined investors know that a sound process yields consistent and superior outcomes even if they don’t see the results in the short term.  

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Take the Next Step and Discover How You Stack Up

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Curious to see how your current position sizing strategy compares to best practices? We invite you to take the first step into a deeper understanding of position sizing best practices. Explore our blog and resources section. We have recently published a three-part series on the fundamentals of position sizing and managers have been raving about it. It describes a spectrum of sophistication for optimal position sizing making it simple to identify your own stage in the process.

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In the end, success in Wordle and investing boils down to the same principle: process over outcome.

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We hope to hear from you.

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