Similarities between Poker and Investing - Page 3

zerosum · #21 10-04-2004, 12:37 PM

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I'd consider zero excess return to be the same as a risk-adjusted return equal to the market return, which is non-zero, while it seems like you're using "risk-adjusted" and "excess" interchangeably.

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I'm pleased that we agree and that we both undertand that terminology just got in the way. In my work, risk-adjusted return refers only to the value added/subtracted by an active selection process, i.e., the excess return. I agree that the reward to accepting systematic risk, the market return in your example, is non-zero. I'm just glad we did not get into a discussion of the issue that frustrates all risk adjustment methods: the joint hypothesis problem.

FWIW, I personally prefer to bootstrap returns relative to factors of risk, and I also place greater emphasis on downside deviation measurement.

sprmario · #22 10-06-2004, 10:11 AM

I'm thinking of one right now... can you guess who? [img]/images/graemlins/smile.gif[/img]

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I think there are many "winning" investors who don't have any edge but just haven't reached the long run yet.

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tek · #23 10-06-2004, 11:13 AM

The biggest similarities are:

1) Millions of people play in each arena, and most play poorly.

2) Most lie about their results.

3) Most repeat the same mistakes.

4) Most do not work on improving their game, except possibly by listening to equally unskilled players/investors giving wrong advice.

5) A few nits end up taking the discussion into arcane tangents.

zerosum · #24 10-06-2004, 01:21 PM

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5) A few nits end up taking the discussion into arcane tangents.

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I completely agree. Here's a great example of one nit's arcane tangent.

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I use charts. They aren't foolproof, but they work for me.

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Just a little humor, tek. I could not resist. Good flops to you.

tek · #25 10-06-2004, 01:53 PM

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

DVO · #26 10-09-2004, 12:01 AM

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 · #27 10-09-2004, 02:02 AM

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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.

BarkingMad · #28 10-10-2004, 02:46 AM

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 · #29 10-10-2004, 04:48 AM

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?

tek · #30 10-10-2004, 09:31 AM

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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.

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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.

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...