The 2+2 Hedge Fund

[illiquid]

The only mediocrity that gets paid on Wall Street are the sell-side brokers -- in other words, salesmen. They are the equivalent of the casino's rake when it comes to the markets -- even the worst poker rooms can make money as long as there are people desperate enough to want to play the game. Mediocre traders on the other hand either eventually bust out (90%+ is likely) or survive and learn long enough to become superior traders. You really need to rise to the top in this game to stay alive, and there is no such thing as dropping down to a lower limit after a bad run in the markets.

I think the mindset of the successful poker player is very similar to that of the successful trader, so psychologically a student of poker may have an easier time dealing with certain aspects of trading; however, I think the structure of how the money flows between the players is very different in comparing the two. In poker, you can be a horrible player, but as long as you are the best player out of the 9 others at the table you play at everyday, you should be able to come out a consistent winner. In the markets, you are competing against the best and brightest 24/7, and it is extremely difficult in any time frame to find some edge to exploit systematically over an extended period of time. Successful systems that DO exist have ever-shortening life cycles, and you need to constantly re-adjust as markets change to achieve longevity. If you guys do manage to find something to exploit that hasn't been uncovered by the countless hedge funds already out there, by all means pour as much $ and as much leverage into it as fast as you can. But I think the parallels between poker and trading remain in the psychological realm and are limited to individual performance in relevance -- I don't believe there would be any special insight a group of poker players can bring to the street that hasn't already been gleaned and applied time and time again. Cool idea in any case, I'm sure the idea can be sold at least.

[Leonardo]

With all due respect Mr. Sklansky, you dont know what you are talking about. It seems as though everyone who dabbles in the stock market, or even is able to multiply numbers quickly in their head thinks they can run a mutual fund and/or hedge fund. I run a hedge fund. The numbers dont have as much weight as the qualitative characteristics. The stock market is the most competitive place on earth. People talk about the big game at Bellagio, which I have not myself played in, but I have played 400-800 with some of what are regarded as the best poker players in the world. It is not in the same ball park. To be completely honest, I think the correlation of skills between running a hedge fund and a managed fund is quite high, but that is like saying the correlation between the skills required to play lacrosse and basketball have a high correlation. They do.You need to be very athletic, great hand-eye coordination etc. But that doesnt say anything. Being a great basketball player is a world apart from being a great lacrosse player. Many of the most intelligent people in the world right now are running hundreds of hedge funds around the world, and Id say from the large number of which I have met, that most of them would destroy the 'big game' if they put their mind to it. You live in a tiny little world that I visit from time to time, and you are completely oblivious to the fact that poker is not the realm of the most intelligent on earth. Great chess players are much more intelligent than the great poker players I have met. And good hedge fund managers, and great financial minds like Henry Kravis, Warren Buffett, Peter Lynch are in another league again. They are playing in a game that makes the 'big game' at the bellagio look like a penny ante game at grandma's house. Never forget that at the big game at the bellagio, people win and lose 100's of thousands of dollars, sometimes millions I presume. In the high world of finance, people win and lose billions of dollars in days, sometimes hours. Such high stakes attract the most intelligent, hungry, probably greedy, competitive people on the planet. The average hedge fund manager is on a different planet from a poker pro. Another point, the so-called 'mediocrity' of wall street mutual funds has little to do with the ability of the people running them. The laws are the problem. Mutual funds have a minimum number of stocks and maximum percentage of funds that can be put in any one stock, cash must be on hand to pay out, and cant go short. The fact that most mutual funds are basically forced to hold at least 30-40 stocks and most hold many more ( Peter Lynch told me he held 100's of stocks) means that the chances of beating the index becomes very small. If managers were able to chose their favourite 5 stocks and invest only in them, I guarantee many more funds would outperform the market. Hedge funds, although a lot dont publish results so it is difficult to tell if they overall do better, are in a much better position to beat the market. They can stick all their money in one stock if they want. A lot of people talk about Warren Buffett, and his ability to beat the market. The man is a genius, I have spoken with him a number of times and his business, finance and general knowledge are amazing, but he had a huge advantage over mutual funds. His was a partnership when he started, and a corporation later(which he is the largest holder of stock). He was answerable to no-one. He often held all of his capital in just a few stocks. I am prepared to say that no person can beat the market when they are forced to hold over 50 stocks all the time , and never more than 5% in any one stock, although Lynch did it for a number of years, that was a freak occurence of extreme talent, very hard work, and luck. Overall, my point is this: 1) Sklansky, you are a smart man, but not as smart as you think. You are theortical king of a small time game played for small amounts of money. Dont confuse yourself with the big boys. Dont confuse Doyle, Phil Ivey, Ted Forrest or Chip Reese with Buffett, Lynch, Robinson, Kravis etc.
and 2) beating the market(long run) is difficult to start with, but because of restrictions that mutual funds face, it borders on impossible. Dont blame fund managers for that.

[DesertCat]

I thought of starting my own investment partnership, but something that Charlie Munger said has guided me ever since. He said if you were a good investor you were better off investing your own money than having partners. If you are good enough, you can live off and grow your own portfolio without being second guessed by partners. So far he's been right.

[David Sklansky]

Jeff Yass and Victor Resnick are two examples of poker players who are favored to do better investing than Warren Buffet. I am sure there are non poker players who are favored over him as well. There is no question in my mind that someone like Howard Lederer, Tom Weideman, or myself could beat 90% of mutual fund managers not so much because of our poker skills but simply because we ar smarter than them, without being ivory tower academics. I am not sure whether you disagree with that or not. I don't argue your point that the very best money managers would outperform Phil Ivey. I do however quarrel with those who think they wouldn't have the best of it if they gave their money to a two plus two run fund if myself and others here decided to do such a thing.

[DesertCat]

David,

I'm disappointed in your post. I'm not sure who Victor Resnick is, but Jeff Yass has a long way to go before he will be able to match Warren Buffett's accomplishments. So if you mean by saying he's "favored over Warren" because he's a better investor, well, no, that's simply not true.

Buffett's track record dates back to the early fifties and probably will never be matched. Your statement is akin to Warren Buffett announcing that he should be favored in the WSOP because he's dominated investing, a field which requires great intelligence, and he's a dandy bridge player, so certainly he'll beat any degenerate gamblers.

If you actually meant that Jeff Yass may outperform Warren in the future, okay, you might have a point there. But only because Warren is investing over $100B, so he's got quite an anchor dragging him down. But pound for pound, Warren is, always has been, and will be, the investment champ.

Warren actually has some poker-like skills. He knows all the math, but relies on quick estimates done in his head from experience when analysing an opportunity. He's got a tremendous memory, probably near photographic. And his central credo is very similar to the theory of poker, and just as useful.

But what he also has over you and Mr. Yass, is over 50 years of experience analysing businesses and their financials. He can quickly size up any business and make a yes or no investment decision, just as you can quickly size up a gambling opportunity relying on your decades of gambling experience.

All that said, if you decided to copy Buffett's techniques, you'd obviously do very well. That's basically what I've done and you are certainly smarter than I. But neither of us can ever be as good at investing as Mr. Buffett, as we've both started too late.

[sizeup]

I started on the CBOE floor as a clerk in 1991 after graduating from MIT, and have been a full-time trader since then. There is edge available in the financial markets but just like in poker many more people believe they have +ev than actually do. I don't doubt that 2+2 authors could do very well managing money given a sustained full-time effort, but that is what it would take. I do not believe the results would be good if trading was not the primary focus for an extended period of time. I would add that beating mutual funds should not be the standard for success as a money manager, as most do not beat the index and many of the best traders will be found at positions where they can better leverage their skills, ie hedge funds, prop desks, trading one's own account, etc.

[Leonardo]

Mr. Sklansky,
Your claim is quite simply the most stupid thing that you have ever said. I sincerely hope you are drunk, because over the years I have come to respect you very much. That respect is being lost by the hour. No one is a favourite to beat Warren Buffett when it comes to investing. I dont know where you got the idea from. I am quite sure you are not aware of Buffett's record nor intellect, which towers yours, Howard's and anyone other professional poker player. His business sense is uncanny. He can describe literally hundreds of businesses, there balance sheets,cash flows, management, strategy, outlook, factors which influence the business profitability, everything that anyone would ever want to know about. I for one know that I am a favourite over any poker player in the world when it comes to investing, and I do not have the record nor immense understanding of Mr. Buffett. I am very close to writing something that I will regret Mr. Sklansky. Please demonstrate that you are not indeed ignorant, read more about Buffett, read all the BH annual letters, understand his philosophy, his record, how much money he has. Even buy a Berkshire share and go to the next annual meeting. You will be astounded by what you see. Ajit Jain of BH will astound you with his intellect, which towers you and the rest of Las Vegas combined. He takes huge gambles on super catastrophe insurance contracts. He knows more about gambling at the highest stakes than anyone alive. When it comes to poker, I respect what you have to say. Please stay in your circle of competence, because leaving it shows your lack of understanding of concepts outside of that small circle. If you couldnt tell, I am quite frustrated. To compare a living legend from the most competitive field on earth to a professional poker player is just flat out ridiculous. Please, for your own sake, walk away from poker for a year or two and realise that the people involved really just arent as intelligent as you thought.

[Freudian]

[ QUOTE ]
I do however quarrel with those who think they wouldn't have the best of it if they gave their money to a two plus two run fund if myself and others here decided to do such a thing.

[/ QUOTE ]

Which is something you won't do. You will just claim the inevitable success as a given due to the omnipotence of people who really really like math.

Myself, I can fly. But only when no one is looking.

[J_V]

What on earth could be confusing?

[Wayfare]

"Jeff Yass and Victor Resnick are two examples of poker players who are favored to do better investing than Warren Buffet. I am sure there are non poker players who are favored over him as well. There is no question in my mind that someone like Howard Lederer, Tom Weideman, or myself could beat 90% of mutual fund managers not so much because of our poker skills but simply because we ar smarter than them, without being ivory tower academics."

While you may have met the poker players mentioned in your statement, how would you judge that they are likely to be better or worse than Warren Buffet without having specific knowledge about Mr. Buffet's skills themselves?

It's akin to an investment professional saying "I met Warren Buffet and looking at his business accomplishments, I bet he would be better at poker than David Sklansky." It's laughable.

In fact, I would wager that if these gentlemen you mention were actually favored against Warren Buffett, they sure as hell wouldn't be grinding out a few 100k / yr at a poker table. They would be where the real money is.