Unless you have been living under a rock or on a deserted island, there is a strong chance that you have seen the mysterious grid of grey, green and yellow square-shaped tiles popping up on your social media feeds, accompanied by creative expressions of triumphant jubilation, sighs of relief or plain frustration.
Welcome to the world of Wordle: the online word game that has taken the world by storm.
For the uninitiated, the humble browser-based word game involves guessing a new five-letter word every day in six attempts. Each attempt, which must contain a valid word, leads to a revelation as to which letters of your word are correct and in the right place (colour-coded in green), correct but in the wrong place (colour-coded in yellow) or do not appear in the word at all (colour-coded in grey).
Once you have solved the day’s puzzle, you are prompted to share your colour-coded grid (without the letters to avoid spoilers) on various social media platforms — a daily ritual for many users worldwide.
So, what has all this got to do with money and personal finance, you ask? Turns out, what appears as a no-frills five-minute online indulgence does contain some interesting investment parallels hidden under the surface. Peel off the layers of this guessing game (Hangman 2.0, anyone?) and you may find some valuable investment lessons lurking in the details.
Let’s dive right in:
Increase your serendipity surface area
Wordle abounds in randomness and noise, both elements equally prevalent in investing. To counter their effects, you must be directionally correct and diversify to optimise resources, lower risks and drive better outcomes.
For example, in Wordle you could either use “Adieu” or “Moron” on your first attempt, but anyone who’s played the game knows “Adieu” offers far better odds of serendipitous discovery by optimising resources to improve outcome.
To draw a parallel between Wordle and investing, one can optimise a portfolio and drive better investment performance by being careful in your selection and well diversified.
This speaks perfectly of having proper portfolio diversification, says Markus Muhs, senior investment adviser and portfolio manager with Muhs Wealth Partners at Canaccord Genuity Wealth Management.
“Owning a bunch of stocks in just a few sectors, or several similar funds, is no more diversifying than using a word like ‘Moron’ as your first line Wordle guess,” he says. “Where the randomness of the outcome is at the max, you want as many different stabs at random letters as possible.”
Not being aware of the fees, fund holdings or overexposure to a certain sector or geography constitutes being directionally incorrect and crimps your optimisation odds, he says.
Playing blind with moonshot investments
At the start of Wordle solving, some words may be directionally correct, such as “Beams”, but they are not necessarily a great first guess. Why? Because B is relatively rare, a better choice may be “Teams” or “Reams”.
When you look at letter frequencies in the English language, B appears in less than 2 per cent of words while frequencies for R (6 per cent) and T (9 per cent) are significantly greater.
And yet, sometimes it is OK to take a chance with “Beams”. In investing, the letter B could be a risky bet like cryptocurrencies, a meme stock or a highly volatile name such as Tesla.
No doubt, the B could be a suboptimal investment choice, but it may pay rich dividends every now and then and help players to crack the Wordle puzzle in fewer tries.
Sometimes you are on line five on Wordle and have to make some risky guesses at finding the right word. It is a common dilemma: repeat letters from prior lines to guess their places or use words with entirely new letters.
“When you are late in the game of investing — if you have determined you are behind in your retirement saving — you might feel compelled to go for that high-flyer investment,” Mr Muhs says.
While most financial advisers will not recommend it, it may be a suitable option for willing clients with certain risk tolerance. It may end up paying big at best or the investor could incur some (bearable) losses at worst.
“Sadly, though, this is how a lot of investors end up losing everything in scams or otherwise overly risky schemes,” he cautions.
Unpredictability is deeply ingrained in the game
The correct word for Wordle #208 was “Abbey”. The word flummoxed a lot of smart people who employ “strategies” with a high probability of success.
As a word with two Bs, “Abbey” did not work well with those strategies. Every now and again, we are reminded of the capriciousness of life. Investing, as is the case with life, has a lot of randomness involved.
For that reason, your outcome is not a singular reflection of your talents or your optimised guesses. We have to make the best decisions we can with the information available at the time.
In investing, as in Wordle, guesses are often made better when they are informed by quality data. Studying relevant insights — the yellow, green and grey tiles — might help in deciding whether or not the next move has improved the odds of success.
Similarly, the trick to better investing outcomes is making use of available information, not focusing on the inherent randomness that may be instrumental in various outcomes, positive or negative, in the short term.
Create and automate
When it comes to investing, making fewer trading decisions works better than frequent. For the average equity investor, the less day-to-day involvement in the investing process, the better.
Investors may be better off buying a globally diversified, low-cost exchange-traded fund and then stepping aside. The logic is simple: create a system that does not need you to micromanage the process.
Josh Wardle, a former Reddit software engineer and the New York-based inventor of Wordle, did that, according to an article in the The New York Times, which this week acquired the word game.
He created a list of 2,500 commonly known five-letter words, approved by his partner Palak Shah, and created software that automated the process of putting out a new word every day for the next few years.
Economist Benjamin Graham once famously said: “The investor's chief problem — and even his worst enemy — is likely to be himself.”
It is difficult for the average investor to pick stocks or time the market. Therefore, it is best to design a system that allows you, the investor, to move out of the way.
“Automation, by way of keeping out of the day-to-day management of your investments, and setting up automatic savings plans can be the most powerful wealth builders over time,” Mr Muhs says.
“I don’t know a single soul in my 15 years in the industry who did anything but build wealth by having a monthly contribution plan set up to go into a highly diversified equity portfolio, while ignoring the markets.”
Don’t believe everything you see
Every now and again, you come across a Wordle score where the player “guessed” the right word at the first attempt, articulated by an immaculate row of five glistening green squares.
While the player would like you to believe they are a “genius” — a title Wordle reserves for this rare accomplishment — it is highly likely that they are being dishonest.
In reality, it is almost certain that they solved the puzzle after several attempts on one device and plugged the right answer in the browser on a different device, making it appear as though they cracked the puzzle on the first attempt.
In the world of investing, a similar strategy can be employed by financial advisers whose pay-cheque comes from the company whose funds they recommend.
The fund company may have many underperforming or unsuitable products, but the adviser will probably downplay that fact and only play up the product that performed well. Interestingly, that specific fund would also be best suited for their client’s “individual” investment goals.
“It is easy for any adviser to show the merits of a back-tested strategy, and too often investors fall for it,” says Mr Muhs. “Put the track record of a technology-heavy, US-overweight portfolio next to a more internationally and sector diversified portfolio over the past 10 years and, of course, the former beats the latter.”
That is how things played out in the market during that period. However, “the same comparison over the prior 10 years shows a very different story”, argues Mr Muhs. He says that the strategy “is about as irrelevant as someone’s fake Wordle score”.
The investment industry is known to spin success stories about their products with misleading presentation of returns designed to create a favourable impression.
So, should we trust people who post genius-level 1/6 Wordle scores? “It is possible, but just as improbable as someone having bought AMC [stock] before its price shot up,” contends Mr Muhs.
