Stock Market as a game of Poker? [Archive] - Two Plus Two Older Archives

DWarrior

07-12-2005, 04:04 PM

I've heard this reference before, and I came to the same conclusion after I played poker for a year (I had some very limited experience with stock market, almost none).

After finishing One Up on Wall Street, I reflected on this a bit. Both Warren Buffett and Peter Lynch referr to the Stock Market as a very complex game of Poker, and from Lynch's description of portfolio management, it seems like each stock is a hand of poker that lasts year.

My question is, if it takes about 4 years to really see the "hand" unfold, if I start trading now, I'll really only begin to see how good I am today 4 years from now and be able to reflect. This assumes I have a good amount to start with, which I don't. More likely, I'll only have enough by the time I'm 25 at best (5 years from now), and that's probably stretching it. This means only at 30 will I really begin to reflect on my "game".

I suppose this is neutralized somewhat by the fact that the market is stacked in our favor. Unlike in poker (in which the average player loses, due to the rake), the average person makes money on the stock market (though probably not the median person), so "being good" really means making more than the market average, and just making that is pretty good in itself.

So, before I dive into this game, is there anything I can do besides read literature? I have at least 5 years, and I'm not going to bother trading on stupid sums like $1000, because the commissions will constitute crazy % of my capital. Would it be a good idea to set up a virtual portfolio after having read the books and pick stocks to practice the strategies?

I really don't think the stock competitions that last for a month are a good way to learn, because they're really just gambling, and there aren't any competitions that I know of that last 5 years.

Sniper

07-12-2005, 11:16 PM

1. Setup a virtual portfolio on Marketocracy.com.

2. Put your $1,000 into a mutual/index fund.

3. Resolve to pay yourself first and setup a periodic investment plan.

Doing these things will increase the chances that you will spend the time necessary to learn about the markets.

DesertCat

07-13-2005, 12:39 AM

The only similarity that poker and stock market investing share is that you want to bet heavily when you are getting proper pot odds, and fold when you aren't. Other than that there is little similarities.

I've been killing low limit poker for over a year now, but I've been killing the stock market for over five years. In the first case I had to read, study and practice, but every poker hand was an exercise in making correct reactions. To be a good investor I had to read, study, and research. Every investment decision was an exercise in doing research, and learning as much as possible about an investment before committing my "chips".

If $1,000 is a lot of money to you, I think you should focus on poker for now. There is no way to earn as high a return on a small investment (less than $100k) in the stock market, than a skilled poker player can using it as a bankroll.

DWarrior

07-13-2005, 02:10 AM

That's what I'm saying. It really doesn't make sense to go into the market with less than $40K, as the commission will be too high, and whatever EV I get will not be as high as what I get playing poker.

And it's not like I'll have $40K spare any time soon, I'm a poor student.

As for the stockmarket to poker reference, I was basically trying to say that both involve betting on information. Each stock is a "hand" in a sense that you gather information and act accordingly as more cards (information nuggets) roll out. It is a bit different though because you have fluctuations during the hand, but the idea seems similar to me.

The one thing I gathered is that there is really no "good company", the "good company" is the hand, and the stock price is the odds. If a company is solid and the stock is high, then that's just as much of a dog as having a bad company. I think when my parents tried to introduce me to stocks back in 8th grade, they didn't have this mentality, as it really comes mostly from poker (AA may be a good hand, but when the flop comes out and you're obviously beat, a good player will run away).

DWarrior

07-13-2005, 02:11 AM

Thanks, I will check Marketocracy out.

Sniper

07-13-2005, 02:37 AM

Firstly, the stock market term "blue chip" comes from Poker!

The skillset/mindset required to be successful in poker and investing are very overlapping.

In both cases doing your homework can enhance your skills. You are looking for +EV situations and to put the odds in your favor. Luck is also a factor. You need to know when to "fold em" (cut your losers short and let your winners run). The Law of Diminishing Returns apply.

Occasionally invest some money in long shots, as they may pay off big. Steal the blinds (a scalp can add to your returns).

I could go on, but I think you get the idea.

Sniper

07-13-2005, 02:55 AM

For the curious, here's a link to my marketocracy port...

http://www.marketocracy.com/cgi-bin/WebObjects/Portfolio.woa/ps/FundPublicPage/source=LaHjCbApDjMgKpGpMaKiAbOa

DesertCat

07-13-2005, 02:26 PM

[ QUOTE ]

The one thing I gathered is that there is really no "good company", the "good company" is the hand, and the stock price is the odds. If a company is solid and the stock is high, then that's just as much of a dog as having a bad company. I think when my parents tried to introduce me to stocks back in 8th grade, they didn't have this mentality, as it really comes mostly from poker (AA may be a good hand, but when the flop comes out and you're obviously beat, a good player will run away).

[/ QUOTE ]

The best analogy I can make as a Value Investor is that every stock has an intrinsic value (IV), much as every hand has an expected value (EV).

If you can make a reasonable determination that the IV of a stock strongly exceeds what it's trading for, you should buy. If you own it, and the IV is equal to or less than current price, sell. Same as you should put more money in a hand if it's a positive EV decision, or fold if it would be a -EV decision.

The problem is of course that coming up with an IV for a stock is never an exact science, and you need to understand a great deal about it's financial statements before you'd even venture a guess.

You can learn these things, and should over time. But in the short run earning 1.5BB per hour on a 500 BB bankroll is roughly a 300% monthly return. You can't do that in the stock market.

Once your bankroll gets close to 100k, then you should think about some diversification. Esp. since your BB/Hour should decline as you increase limits.

Sniper

07-13-2005, 03:41 PM

[ QUOTE ]
earning 1.5BB per hour on a 500 BB bankroll is roughly a 300% monthly return

[/ QUOTE ]

Ummm.... a 300% return (1500 BB) at 1.5BB/Hr would be 1000hrs/month?

5K -> 1mil+ in under 4 months? and 1Bil in 9 ?

Lets be realistic /images/graemlins/wink.gif

DWarrior

07-13-2005, 06:31 PM

[ QUOTE ]
[ QUOTE ]
earning 1.5BB per hour on a 500 BB bankroll is roughly a 300% monthly return

[/ QUOTE ]

Ummm.... a 300% return (1500 BB) at 1.5BB/Hr would be 1000hrs/month?

5K -> 1mil+ in under 4 months? and 1Bil in 9 ?

Lets be realistic /images/graemlins/wink.gif

[/ QUOTE ]

I think he meant to say yearly, because if you do the math: 1.5BB/hr, 20hrs/wk, 52wks/yr is around 1500BB, which is a 300% return on the 500BB bankroll. 20 hours per week is pretty realistic.

As for the blue chip reference, I learned that soon after I started playing poker, and I also picked up Intrinsic Value.

I haven't had a chance to dive into marketocracy, but from a quick scan, it appears to be a ton of numbers and graphs, so I'm sure I'll enjoy it /images/graemlins/smile.gif

DesertCat

07-14-2005, 01:22 PM

[ QUOTE ]

Ummm.... a 300% return (1500 BB) at 1.5BB/Hr would be 1000hrs/month?

5K -> 1mil+ in under 4 months? and 1Bil in 9 ?

Lets be realistic /images/graemlins/wink.gif

[/ QUOTE ]

Whoops. I meant 30% a month, obviously. One problem with the returns on a Poker bankroll, vs. a stock market portfolio, is that poker returns don't compound very well.

As you grow your bankroll, it can't earn more unless you move up in limits and still win. And if your win rate declines at higher limits, like it should, your ROB (return on bankroll, /images/graemlins/grin.gif) declines as well.

Finally you reach your best level, i.e. where you can't find higher games you can beat for a higher hourly gain. At that point clearly you need to take all of your excess bankroll and find good side investments for it.

Sniper

07-14-2005, 01:47 PM

Right the market has the advantage of compounding which is huge over time, and exactly why you want to start investing as soon as you can even with small amounts.

However, since you brought it up, I would be interesting in your thoughts on reasonable ROI in poker.

Lets assume as in your example that someone used 500BB as the move up limits point. If you started with 5K playing 5/10, what would that player be looking at at the end of a year worth of play? (feel free to use whatever reasonable assumptions on monthly table hours and win rate you think appropriate) Is it reasonable to think that player could attain 55K by yearend, a 1000% ROI?

What about year 2 starting out playing 50/100 ?

My feeling is that poker returns become more linear, while the market returns become logarithmic over time.

DWarrior

07-14-2005, 03:12 PM

I was just reading the article in the newest 2+2 issue about this, it's titled something like "what poker players can learn from blackjack players", and in there, the formula he gives for having a bankroll that will grow most optimally is EV/SD, I think, but he does say that there is a 50% risk of ruin in that.

I think that Poker is a hybrid between investing in securities and work, because my primary concern isn't ROI, but rather $/hr (or BB/hr, whatever floats your boat).

In investing, I don't see much point in trying to compute your hourly rate every step of the way, but you can look back after several years and see if the time spent was worthwhile. It seems like investing is converting money into more money.

Similarly, when you're going to your job, it's a bit silly to look at your savings account as your "bankroll" and consider your wage as ROI. You're really converting time into money. However, I suspect after several years, you can look at the growth of your savings account and see if taking up another endeavor would have yielded better profits.

I see poker as being somewhere in between, where you're converting both time and money into money. Who do you think does better, a person with $10 bankroll winning $20 in a freeroll after 3 hours of work (200% ROI), or a person with a $1000 bankroll winning $20 in ring games after an hour of work (2% ROI)?

Also, you won't always make higher returns with more money you have, it's just that there is no difference between $100,000 and $500,000 is the US markets today. If you made 20% returns consistently on $100,000 doesnt' mean you'd make the same 20% returns on $50 billion, it's just that the amount of money for the diminishing returns to kick in are so high that most regular people never experience it, as most investors don't control enough funds to move markets.

Sniper

07-14-2005, 04:24 PM

[ QUOTE ]
the formula he gives for having a bankroll that will grow most optimally is EV/SD

[/ QUOTE ]

EV/SD (Expected Value/Standard Deviation, for those who didn't read the article) can be used to evaluate many financial decisions. In fact volatility is a key factor in the options pricing model. However, this conversation hadn't yet reached the point of discusing drawdowns. etc.

The basic assumption, by Desetcat in his post, was a average-good (maybe a 2+2er that actually learned something from the 2+2 books) that could achieve 1.5BB/Hr to start.

[ QUOTE ]
I think that Poker is a hybrid between investing in securities and work, because my primary concern isn't ROI, but rather $/hr (or BB/hr, whatever floats your boat).

[/ QUOTE ]

$/Hr is a ROI calculation... Dollars Earned per Hour invested.

[ QUOTE ]
Who do you think does better, a person with $10 bankroll winning $20 in a freeroll after 3 hours of work (200% ROI), or a person with a $1000 bankroll winning $20 in ring games after an hour of work (2% ROI)?

[/ QUOTE ]

From a bankroll perspective, the first is better, if each can consistantly achieve the same ROI (bankroll)over the long term, increasing the limits played according to the same parameters... in other words, if you could triple your bankroll every 3 hours you would very rapidly surpass a player earning 2% every hour, even if the 2nd had a $990 head start. In fact in only 15 hours, the 1st person would have a bankroll almost twice the size of the 2nd. /images/graemlins/wink.gif

[ QUOTE ]
it's just that the amount of money for the diminishing returns to kick in are so high that most regular people never experience it

[/ QUOTE ]

Part of the reasoning in my earlier post is suggesting that diminishing returns hit MUCH faster in poker than they do in investing/trading.

Dan Mezick

07-14-2005, 08:03 PM

Making a trade is just like finding a "good spot" to make a play in poker.

You look for most of the properties you want to see in the scenario before the trade. Usually, you want at least a 1:3 risk to reward ratio minimum. Learning to judge which spots have the ratio you want is part science and part art form.

There are usually many other properties that have to be there (in the situation) to form the complete setup.

No matter what, you must cut losers, ride winners, keep bets small and manage risk. Just like poker, you can do this and still lose (slower) if you have a method with no quantifyable edge.

"If you don't know what your edge is, you don't have one." - Jack Schwager

70challenger

07-15-2005, 12:05 PM

I play a virtual stock market game from a on line gaming site .....it's played with real money. In the first month of trading I invested 280.00 and the portfolio went up to 4200.00 My problem is that I never know when to get out. Today it's sitting back at 2100.00.

I've been told that when you see it climbing...and this would perhaps pertain to any kind of stock you buy....let it rise to it's peak level....then when you see it drop down 10% sell out as this MAY be a correction in the stock itself. If I had followed this rule of thumb, I would have been able to buy back in with MANY more shares than I originally bought. Making my portfolio worth many times more.

In any case this game pays dividends on one of four virtual companies (randomly selected) each week ....they actually announce the dividend company and give you a chance to invest in it before dividends are paid out....not too much of a gamble there.

But yes ...I would agree...it's like a very long poker game with HIGH STAKES! And just like poker, timing is everything.
Know when to get out.

DWarrior

07-15-2005, 12:45 PM

FYI, when the dividends are announced, I believe the stock actually gets corrected (I think it's corrected automatically, not by the market), so if a company paid, say, 5% in dividend, the stock drops by 5%, so you really don't gain anything by buying it based on the dividend payout.

RedManPlus

07-15-2005, 06:06 PM

[ QUOTE ]

If $1,000 is a lot of money to you, I think you should focus on poker for now. There is no way to earn as high a return on a small investment (less than $100k) in the stock market, than a skilled poker player can using it as a bankroll.

[/ QUOTE ]

I've made about 200,000 trades last 10 years...
And DesertCat is right...
You need at least $50,000 to $100,000 to start playing this game.

On the other hand...
imo, stock market and poker are NOT similar...
Successful market players are hedgers and gringers...
Arbitrageurs not gamblers.

On the other hand...
** Running a business ** in the harsh, unforgiving business world...
Is very comparable to the strategic analysis of NL poker.

rm+

/images/graemlins/cool.gif /images/graemlins/cool.gif /images/graemlins/cool.gif

70challenger

07-15-2005, 06:38 PM

FYI....the stock usually climbs when a dividend is announced in this particular GAME. If you already had shares in this stock before the announcement....well....you'll do well. Buy low sell high. Unless you've been playing ...you would have no idea as it really doesn't work like the real stock market. And there's a lot more to it than I care to get into. So far it's been alright....for me anyway.

I'll be using the 10% rule to sell at the right time...this time around. (I missed the boat last time)

Just my two cents worth.

solucky

07-15-2005, 06:45 PM

I invest since 20 years on the stockmarkets and i start with 250$ !!!!!!!! Dont invest with "playmoney", you dont make the same decisions with a virtuell depot. You should see it as learning-money. And dont look for $$ look to %%%, the best way is to make a excel-sheet with a benchmark. At sample i can invest 4K / year and expect 12% anual and than look where you are with 45 -50

Sniper

07-15-2005, 09:03 PM

[ QUOTE ]
I play a virtual stock market game from a on line gaming site .....it's played with real money.

[/ QUOTE ]

Based on your description this sounds like a TOTALLY virtual game... are the virtual stock movements based on anything other than the games random number generator?

Sniper

07-15-2005, 09:15 PM

[ QUOTE ]
I've made about 200,000 trades last 10 years...
And DesertCat is right...
You need at least $50,000 to $100,000 to start playing this game.

[/ QUOTE ]

Maybe the game you are playing at 40-50 trades/DAY!

But you certainly don't need that amount to get started as an investor (Any amount will do).

Even an entry level day-trader can get started with about 30K (note you need 25K to take advantage of favorable 4:1 margin trading).

[ QUOTE ]
Successful market players are hedgers and gringers... Arbitrageurs not gamblers.

[/ QUOTE ]

There are many different methods to be successful in the market and your decription does not even cover the majority of "successful" market players.

70challenger

07-15-2005, 11:12 PM

Yes completely virtual companies (4 to choose from)real money....

the movements are based simply on supply and demand....no outside forces.

I bought some CD (mining) shares on the Vancouver exchange a few years ago....and they were doing really well...they were negotiating a JV with Falconbridge....and then the SS cole incident happened in Yemen.(JV didn't happen) These outside forces caused the share price to plummet. The deposit is still there.....but the area had become volatile. Who needs that.....I still have all my shares.(@.05) each......bought at .11 & .16

So I'm trying out this virtual thing.

imported_bingobazza

07-16-2005, 06:51 AM

[ QUOTE ]

I really don't think the stock competitions that last for a month are a good way to learn, because they're really just gambling, and there aren't any competitions that I know of that last 5 years.

[/ QUOTE ]

This isnt investing, its trading, and a month is OKish for this. Many traders would disagree that its gambling. From what I understand about trading (which is limited) bankroll management, ROR considerations, EV expectation, coupled with discipline and patience are essential to long term success. This is where trading is like poker IMHO. Im sure some more knowledgable people may have a different take.

Bingo