Stock Market as a game of Poker?

DWarrior · #1 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 · #2 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 · #3 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 · #4 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 · #5 07-13-2005, 02:11 AM

Thanks, I will check Marketocracy out.

Sniper · #6 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 · #7 07-13-2005, 02:55 AM

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

http://www.marketocracy.com/cgi-bin/...MgKpGpMaKiAbOa

DesertCat · #8 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 · #9 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 [img]/images/graemlins/wink.gif[/img]

DWarrior · #10 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 [img]/images/graemlins/wink.gif[/img]

[/ 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 [img]/images/graemlins/smile.gif[/img]