Stocks and No Limit Poker, from Jim Lackey

July 15, 2010 |

winnings from a NL Poker game Stocks are much like no limit these days… you have one or two 10 minute bars to decide to go all in risk all or fold.

Vince Fulco writes:

Phenomenal observation. It's a function of fake liquidity. You've got to pick your spots wider and expect the reactions to be more severe in both directions. I read somewhere the other day the theory that folks are pricing in too much tail risk. Is this what happens when an economy is built on sand?

Jeff Watson writes:

Interesting comparison of stocks with no limit poker. While the risk of ruin approaches 100% in NL poker, I wonder what the risk of ruin would be in the stock market, especially with short term trading. I suspect that it would be higher than one would expect, with the vig, mistakes, and just being wrong factored in.

Jim Lackey writes:

No…anyone is capable of "not taking risk" and to see people brag about not losing is hilarious. No profits either, at least none to brag about vs. some indexing. To make real money you have to take real risk. Period. End of story.

Rocky Humbert comments:

How return is related to risk is a subject worthy of extended discussion, and I don't have the time to launch that thread right now.

However, I want to note that Fama has backed away from his early work that pioneered the model that the two must go hand-in-hand.
I for one do not accept the proposition that one must take large risks to have large returns and this distinction is a key difference between gamblng and investing.

This is a fascinating subject… I hope others will contribute. I have a plane to catch.

Jeff Sasmor comments:

"To make real money you have to take real risk period end of story." Yes!

Isn't the ultimate metric whether or not you make money? If you are good at scalping the E-mini SP on a 5 min chart and make money doing that then IMO it trumps the issues of risk and vig. Personally and IMO, and I know that most here will disagree (except maybe Jim) scalping has the lowest risk albeit with more vig (vig is pretty cheap these days at $4/round trip for the Emini SP and since one Emini SP ~= 500 SPY it's much less vig than the ETF). I don't even factor commissions into my thinking anymore.

But longer time frames are more comfortable for most people - and yes the vig is proportionally less but one downside among many is that you're much more susceptible to your own emotions about getting out of a losing trade (or a winning one) - and that's an additional term in the vig equation.

With computers (Skynet) running the show these days you can get your "head handed to you" no matter what time frame you're using. They seem to love chaos and high volatility, sort of like the Shadows in the old TV show Babylon 5; or for real sci-fi nuts - the eddorians from the Lensman space opera series. Or for others: think of computerized Sith.

Comments

2 Comments so far

korareddy on July 15, 2010 2:14 pm
wannabe from India interprets as “I have a plane to catch.” as nothing but do not show openly your risk/stop/pain/game-over etc. stop loss to the house, ( since 3 night’s am having sleepless nights , in interpreting that “catch and release” post and it’s applicability, just before earning’s season/ such a violent move of 11 downs followed by 6 or 7 ups etc..)
&
am eagerly waiting to hear the other missing pieces apart from the conspiracy theories of fairy tales between the CFO and his/her g/f friend ??
&
it is a different matter with some 65-70 % probability it pays’s to fade that move on open of INTL’s Q’s earnings , reminds Lord Nathan Rothschild borrowings of “sell to the sound of trumpets” …
steve on July 18, 2010 11:42 am
not sure if I am in synch with this analogy. No limit hold-em tournament play is a top heavy investment. Meaning if 200 people enter a tournament, typically the top 10% get payed something. I have also seen where only the last table gets paid. The winner of the tournament may get 20%-30% or the total pool. Structures change for different venues of course.

In no-limit cash games, your table stakes are at risk. You may lose up to the amount you have in front of you. If that is exhausted, you may reach into your pocket and replenish your stack. Florida poker games have expanded their limits to $200 buy ins to $1000 buy ins.

There are other inconsistencies with this analogy. Once you have invested in a hand the money stays in the pot. It can never be taken back.

So obviously with respect to stocks, Once you buy a stock, you can sell it for market value, the money you put in you can take out, subject to market conditions. and rarely does a stock plummet to zero immediately.

Secondly, stocks have no time frame. You may hold onto them indefinitely until conditions improve provided the company remains solvent. This would be analogous to keeping the same two cards and waiting for favorable flops to continue with your betting.

Third, with stocks, one may spread their risk by investing in a portfolio, an annuity, mutual fund etc. There is no way to spread risk in poker other than to play online and play multiple games at the same time. But in the end, it is still gambling.

Fourth, with respect to poker, in order to win a hand it may require investing more money into the pot to win. You may not go all- in on the pocket cards you were dealt, you may go in on the flop, the turn, the river.

For most of the poker playing public, it is just another form of gambling, one that an inordinately high number of people are going to fail at. Check out the true number of “poker professionals” those who make a significant living out of playing poker full time and you will be very surprised as to the celebrities are really mere poseurs.

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