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.

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