An Important Poker Lesson About Respecting Luck

 

(Previously posted on IBANKCOIN)

I usually post charts on The PPT and discuss technicals on here, but this time I thought I’d talk about the way in which I built up enough capital to create a portfolio and pay down my law school student loans—playing poker.   Although it is common to hear poker references in the trading and investing community  (e.g., “going all-in”),  the subtle aspects of the game are usually what separates the consistent winners from the perpetual losers.

The main overarching concept is the idea of selective aggression.  This is what gets the money.  You need to be patient until you see an opportunity and then aggressively attack it.  Warren Buffet talks about this a lot with his “wait for a fat pitch” idea. The Fly exemplifies this very well as he was in your face bearish during the bear market, and is now in your face bullish during the subsequent rally.

Beyond that, however, is the idea of losing when you know you SHOULD be winning. A good example of this in poker is what is called game selection.  You can be the 10th best player in the whole world, but if you’re sitting at a table with the 9 best players, then you have become the sucker and you are a big underdog.   The few winning pros (talking about cash game players, not tournament players) go to great lengths to find a game full of weak players who, e.g., put their money into the pot with weak cards when they should be folding.  In theory, if you are a good player and you find a juicy game where you play mathematically superior to your opponents, you have an expectation of winning the money.  In fact, this is precisely the situation where pros derive their edge and income.  Moreover, winning pros avoid at all costs those other non profitable situations.

So, with that said, let’s say you find yourself at a table full of donkeys, and you are the winning pro.  You expect to win. However, for weeks on end, the cards simply do not cooperate.  When you have pocket Aces, you lose.  When your opponents have pockets Aces, they beat your pocket Kings. And so forth.  You become frustrated because you know you should be winning lots of money.  But you are losing day after day.  Many poker authors–famous ones–have advocated in this situation that the best thing you can do is to keep buying back in and to keep playing with no regard to your bad luck.

However, that advice is exactly the mentality of the short-selling bears who have been fighting this tape since last March.

First, the human element is a factor, as just about everyone becomes so frustrated with consistent bad luck that they go “on tilt” and start playing poorly.  At this point, the winning pro loses his edge and starts to become just another poker player destined to go broke.  Therefore, not fighting the prevailing trend/luck becomes far more important than you might think.

I know it may seem that this post can be summed up by simply saying “don’t fight the tape,” and to sit out and wait until your bad luck is over.  But that is not the answer because an indefinite sabbatical doesn’t make you a better trader nor poker player. Rather, the best thing to do in poker, when you are doing everything right but still losing, is to play for smaller stakes and play for shorter periods of time.  Eventually, you will feel as though you have regained your edge (even though mathematically you never lost it as long as you didn’t go on tilt) and you will be ready to bump back up to your regular game.

I believe that this idea is one of the main reasons why I was a consistent winning player while many other players I knew (who were probably more talented than me) went broke.  During losing streaks, they would become upset, play poorly and then try to “chase” their losses back by playing for higher stakes and playing for longer hours.  Some would even totally degenerate and blow the rest of their money on blackjack, craps, roulette, sports betting etc..

Applied to the stock market, if you are a bear who has been getting your face beaten in (and I am one of these coked-out Kudlow perma-bulls FYI), you probably think you should be making tons of coin given the still-debt ridden economy and high unemployment, etc.  However, now is not the time to keep doubling down on your shorts.  Rather, seek to make your trades smaller and less frequent for as long as it takes until you feel like you have regained your momentum.  The same applied to the bulls during the late 2007-early 2009 period.

-SALUTE