Similarities between Poker and Investing

[tek]

LOL. Good to see some more humor [img]/images/graemlins/grin.gif[/img]

[BarkingMad]

I don't want to stir the pot too much here, but I was surprised to read a post from someone with eight years of professional involvement in the markets arguing that stocks are zero sum.

I'm not a market professional, but I have alot of experience trading stocks, futures, and options. More importantly, I've done a huge amount of reading. The fact that the stock market is not zero sum is widely understood by professional traders.

Here's a simple explanation why.

The derivative markets (futures and options), are actually a zero sum minus game. It's possible for me to buy soybeans at $7.00 and for you to sell them at $7.00, and provided the market remains relatively unchanged, we both lose after slippage and commission. With derivatives, there are always two parties on each side of a contract. The number of game "players" is always Open Interest X 2. Thus, zero sum (zero sum minus, when trading costs are factored in).

In contrast, stocks are an equity creation mechanism that represent ownership in a company. It's possible for you to buy IBM at $75, then sell it to me at $100, and then for me to sell it to a 3rd party for $120.

More significantly, It's possible (and common) for the winners to outnumber the losers at any given point in a stock's history. The converse is also true. Thus, stocks are not a zero sum game.

-Lance

[adios]

Here's what zerosum stated in his original post in this thread:

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Quote: "The stock market is not a zero sum game."

On an absolute basis, I agree with your opinion. However, on a risk-adjusted basis, the stock market most certainly is a zero-sum game.

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Are you still at odds with this?

[BarkingMad]

The reality of the situation is at odds with the quote you posted. ‘Risk adjusted’ has nothing to do with it.

The crucial point is that in stocks there is not an equal number of sellers taking the opposite side of each stock buyers position. A company issues shares, and investors buy them. The only way to profit if the stock goes down is to “sell short” by borrowing shares from an institution and then selling those shares to a buyer, but short sellers are not crucial to the existence of the market. In many cases, there are only buyers.

Look at a chart of stock that is at an all time high, and ask yourself, where are the losers? There are none. The investors are winning, and the company that has issued the shares is winning.

This win-win scenario is impossible with zero sum games.

In zero-sum games the amount of winnable money is fixed. Whatever is gained by one player, is lost by the other player; the sum of gains and losses is zero.

In stocks, the sum of gains and losses does not have to equal zero (and rarely does). Therefore, the stock market is not a zero sum game

-Lance

[DVO]

Warren Buffett ( who prefers bridge, by the way) would probably tell you something like this:

Both poker and investing are about waiting for opportunities to to bet huge overlays - and then betting big when you find them ( they are rare).

He's the ultimate 'tight-aggressive' investor. Superhuman patience combined with the willingness to go all-in.

In my experience, poker is much, much harder to succeed at in a major way. For one thing, in investing there are no antes or blinds. You can wait forever for your 'fat pitch.' No called strikes. ( This is Buffet's comment as well.)

Also, you are not facing a 5% rake in investing. This is a huge issue over time.

Another big advantage of investing is the natural inclination for growth ( Johnson & Johnson will most likely be bigger in 10 years than it is now. So will world-wide GDP. That momentum works in your favor if you choose a stock well.) No such natural momentum exists in poker ( I think).

Als, the swings in investing are just not as brutal or as damaging psychologically as they are in poker. If you are smart and patient, 4 out of 5 ( or some such number) investments will work out well for you. But you can play hand after hand perfectly and get hammered, as we all know.

[adios]

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In my experience, poker is much, much harder to succeed at in a major way.

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I agree with all of your points and I'd like to add one more. FWIW IMO poker players in the aggregate are much more knowledgeable about putting money at risk and are basically much tougher competition. I realize that there are plenty of live ones in the poker world though.

[tek]

[ QUOTE ]

In my experience, poker is much, much harder to succeed at in a major way. For one thing, in investing there are no antes or blinds. You can wait forever for your 'fat pitch.' No called strikes. ( This is Buffet's comment as well.)

Also, you are not facing a 5% rake in investing. This is a huge issue over time.

Another big advantage of investing is the natural inclination for growth ( Johnson & Johnson will most likely be bigger in 10 years than it is now. So will world-wide GDP. That momentum works in your favor if you choose a stock well.) No such natural momentum exists in poker ( I think).

Als, the swings in investing are just not as brutal or as damaging psychologically as they are in poker. If you are smart and patient, 4 out of 5 ( or some such number) investments will work out well for you. But you can play hand after hand perfectly and get hammered, as we all know.

[/ QUOTE ]

There are no blinds, antes or rake in financial markets, but there is opportunity costs. If your investments are not moving much, you are losing profit you could make in some other investment.

GDP has an equivilant in poker--the poker market has been expanding for many years.

Swings in investing can be brutal depending on what you invest and the the time period you hold them.

Just a few thoughts on a Sunday morn...

[DVO]

"There are no blinds, antes or rake in financial markets, but there is opportunity costs. If your investments are not moving much, you are losing profit you could make in some other investment."

1) Poker has rake costs plus opportunity costs (Investing has only opportunity costs ( assuming you do it yourself)

2) Good point, if you assume the additional players are disproportionately 'fish'..a reasonable assumption.

[BadBoyBenny]

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There are no blinds, antes or rake in financial markets, but there is opportunity costs. If your investments are not moving much, you are losing profit you could make in some other investment.


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There are trading fees, or management fees for mutual funds. These fees, what I consider to be a cost of liquidity are very similar to the rakes in a casino as I consdier them the cost a creating the games and drawing in diverse groups of people.

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GDP has an equivilant in poker--the poker market has been expanding for many years.

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This analogy makes some sense, but the financial markets are the equivalent of a few world-wide poker games. My home game does not grow because more people watch poker on TV. The field size of local tourneys do though, so I see your analogy as being partially correct. More so if you live by and play at a casino.

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Swings in investing can be brutal depending on what you invest and the the time period you hold them.


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Very true, and this is a good reason why it is better to have a financial advisor who is good a risk management than one who recommends hot stocks or guarantees rates of return.

[tek]

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There are no blinds, antes or rake in financial markets, but there is opportunity costs. If your investments are not moving much, you are losing profit you could make in some other investment.


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There are trading fees, or management fees for mutual funds. These fees, what I consider to be a cost of liquidity are very similar to the rakes in a casino as I consdier them the cost a creating the games and drawing in diverse groups of people.

[/ QUOTE ]

Ok, management fees could be considered a rake if they are charged no matter what the investment rresults are.

As far as brokerage fees, they are not charged unless a trade is made, so I don't consider them to be blinds or antes...

I'm even amazing myself at what a nit I'm being [img]/images/graemlins/smile.gif[/img]