Silent Archimedes

Posts Tagged ‘hold ’em’

When is poker gambling? Analogies to investing in stocks.

Posted by silentarchimedes on December 24, 2008

Screenshot of Texas Hold'em Poker 3D

Screenshot of Texas Hold'em Poker 3D

To those people that play poker for its competitive atmosphere or its mathematical excitement, it is not gambling. However, to the outsider or the concerned family member or friend, poker is gambling and any attempts to justify it are simply excuses. I am more in the former camp, but I also know that there are varying degrees of how one plays poker that determines how much poker is a game of skill versus luck. Playing poker is very similar to investing in stocks or mutual funds. A person can play it such that luck is the overriding factor in whether he or she wins (like playing the lottery) or the person can become informed and knowledgeable in all the aspects of the game (like the game of life). Educated poker is about rules, probabilities, psychology, and strategy. Educated investing is about laws, microeconomics, macroeconomics, markets, company details, management details, buying strategy, and selling strategy.

Poker and investing is gambling when…

1a. You pick random hands to play even when the odds are against you.
1b. You pick a random company to invest in.

2a. Even when you know you have a losing hand you keep raising and hope to bluff or scare your opponent into leaving the hand. In other words, you risk going down with the ship. You don’t know when to cut your losses.
2b. The company you invested in keeps missing its target numbers. Instead of cutting your losses, you hope for a turnaround that seems further and further out of reach. You don’t know when to cut your losses.

3a. You don’t even know the probabilities well enough and what the odds are of the next community card being in your favor. You are playing blind, so to speak.
3b. You know what the company basically does, but you don’t read its quarterly reports or anything about P/E ratios, operational cash flow, debt levels, etc. You will be blind to micro-economic problems that can drop the stock like a rock.

4a. You misjudge your opponents’ hands. Being too optimistic in your chances, you turn blind to the fact that your opponent might be holding a pair of Kings because you are hoping that two diamonds come down on the turn and river.
4b. You become attached to the company you invested in and are blind to emerging companies with better technologies or other competitors whose pipeline is looking better than your company.

5a. You keep losing hands. Your track record of winning in poker is below 50%. However, you have a hard time stopping and your losses eat inside you even when it’s over.
5b. You keep losing money in your investments. Your track record of picking sound investments is below 50%. However, you have a hard time letting go and you keep pouring in money into the same losing investments.

6a. You have no long-term poker-playing strategy or your strategy is not working. However, you ignore this or you have blind faith that it will eventually turn in your favor. Gambling is about false hope, blind attachment and ignorance of your true abilities.
6b. You have no long-term investment strategy or your strategy is not working. You know when to buy but have a hard time determining when to sell.

7a. You are too emotional. You take losing hands very hard. They eat inside you hours or days afterwards.
7b. You are too emotional. You take losing investments very hard. They eat inside you for days and even months afterwards.

8a. You are too risky. You regret bets that don’t pan out. You wish you didn’t plop down $20 on a hand that you knew you’d probably lose anyways.
8b. You are too risky. You regret investments that don’t pan out. You wish you didn’t plop all that money on a technology that had only a tiny chance of succeeding.

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I like the saying that poker is short-term luck and long-term skill. The goal for the player is to decrease the length of that short-term luck to as short as possible. By maximizing skill, you minimize luck, and the game becomes less about gambling and put you more in control of the outcomes. The problem with playing the lottery or slot machines is that no matter how much you learn or the type of intricate strategy you use, the big chunk of luck can never be reduced. However, poker and investing can be done such that the luck or gambling aspects of the game is greatly reduced.

Why do you think the same poker players are at the final table in poker tournaments all the time? Doyle Brunson? Why do you think investors like Warren Buffet are consistent winners in their investments? The homework those guys do can be loosely equated to Michael Jordan and Tiger Woods’ attention to detail.

Good luck! Well, good skill!

Related link:

The Mirage of the Martingale

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