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JEast
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As all investors dabble in some form of gambling at some point, I came across an interesting statistic on playing poker.  Kyle Siler, a social scientist from Cornell University, looked at 27 million online poker hands in 2009.  His insight was that the more hands a player won, the less money they actually collected. Sound familiar with trading too much?

 

Another data point to follow the Buffett/Munger rule to invest infrequent and when you do, invest big.  Or per Charlie, "Stock-picking is like gambling; those who win well, seldom bet, but when they do, they bet heavily".

 

References if you are interested.

http://www.ncbi.nlm.nih.gov/pubmed/20054621

http://www.ozpoker.net.au/poker-strategy/kyle-silers-poker-study

 

Cheers

JEast

 

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1- In general, I'm not sure if an analogy could be drawn to investing.  Poker is a game with a fixed set of rules and fits very well with game theory.  Investing is a lot messier and is sometimes difficult to model mathematically.

 

2- As far as the poker study goes... isn't that just a case of adverse selection?

 

There are some really awful strategies in poker (e.g. doing far too much or far too little of calling, betting/raising, and folding).  If you win a lot of pots, you are probably using a bad strategy (e.g. calling or raising far too often, not folding often enough).  So is it surprising that these people are the least profitable?

 

3- Ed Thorp has a lot of interesting articles and interviews on gambling and investing.  He figured out card counting for blackjack and wrote a paper on it.  He also ran a profitable hedge fund, invested money for Buffett's ex-investors, etc.

 

Sound familiar with trading too much?

In David Swensen's book, he advocates for institutional investors to rebalance between their asset class allocations.  This takes advantage of excess volatility in the market.  If you don't pay tax and your trading costs are low (neither is the case for retail investors), it is an ok strategy to sell a bit of what has gone up and to buy a bit of what has gone down on a daily basis.

 

Ed thorp (stat arb), Ben Graham (cigar butts, merger arb), and Joel Greenblatt (e.g. magic formula) all have implemented strategies that involve a lot of trading.  It's a different style than Buffett's and Munger's bread and butter, which is waiting around for fat pitches and buying excellent businesses at fair prices (and holding them for very long period of time).  Though Buffett did engage in strategies which involved a lot of trading.

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Another data point to follow the Buffett/Munger rule to invest infrequent and when you do, invest big.  Or per Charlie, "Stock-picking is like gambling; those who win well, seldom bet, but when they do, they bet heavily".

 

 

Cheers

JEast

 

While I agree overall with the thought process they are a little misleading.  They may seldom bet but when they do they have a controling interest or large enough that management has to deal with them.  The average retail person does not have that option.

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the more hands novice poker players win, the less money they win overall.

 

He examined 27 million anonymized hand histories, and found that the larger the percentage of hands a player wins, the less money they tend to win.

 

If he is counting percentages of all hands dealt then the people winning the most hands are aggressive fish.  They win a lot of small pots with bluffing but the table adapts extremely quickly and they go broke once someone gets a good hand.

 

If he is only counting percentages of hands where money was voluntarily put in the pot (VPIP) then the people winning the most hands are tight or passive fish. 

 

These play styles are pretty well known losers.  You could play tight, abc poker at the lower stakes and be a winner, but it's basically a waste of time.

 

I don't think the analogy to trading/investing really applies.  In poker you can't sit back and take 1,000 pitches until you get a big hand.  A) you bleed to death from blinds B) everyone with half a brain knows you have a hand and you won't get optimal returns from your monsters.  You have to play at least a tight aggressive (TAG) style of play to obfuscate your hand.  It's been a while but I think this is basically a minimum of 15% VPIP (at a full ring - 9 person table. The less people the higher the VPIP required).

 

I only dabbled in studying/playing online.  Winner at 10nl, 25nl, 50nl before I stopped.  I'm sure there are posters here with far more experience than me if they want to correct anything.  N.b.  all styles of play are table dependent. 

 

Stock-picking is like gambling; those who win well' data-ipsquote-timestamp=' seldom bet, but when they do, they bet heavily[/quote']

 

If there were a table of people playing this strategy any competent player with a novice amount of studying could have all their money by the end of the night (iterated enough to account for variance).

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Basically what Otsog said, but one small correction:

 

If he is only counting percentages of hands where money was voluntarily put in the pot (VPIP) then the people winning the most hands are tight or passive fish.

I would expect that a too tight, but very aggressive player will win the highest percentage of hands when he plays. In general aggressive players win more often than passive players because they can win by getting the other player to fold. A passive player only wins if he has the best hand.

 

(I'm by the way playing poker for a living)

 

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Claude Shannon and John Kelly applied information theory to making money in games of chance or trading.

 

Here is link to Kelly's paper,

 

http://www.bjmath.com/bjmath/kelly/kelly.pdf

 

Kelly originally titled his paper "Information Theory and Gambling," but was persuaded by AT&T to change it, which he did to "A New Interpretation of Information Rate."

 

More readable, and entertaining, is Fortune's Formula,

 

http://www.amazon.com/Fortunes-Formula-Scientific-Betting-Casinos/dp/0809045990/ref=sr_1_1?s=books&ie=UTF8&qid=1360715178&sr=1-1&keywords=fortune%27s+formula

 

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Not a pro, but I've probably played a few hundred thousand hands online. Sometimes 16 tabling PLO hi-lo and hold 'em, lol. I believe poker probably makes you a better trader. Less applicable to investing.

 

I think the opening post is true for low limit full ring games (9 players). So it only applies to games that get boring quickly if you like poker. I would say it kind of applies short handed, but not really. Maybe on a relative basis. Short handed play requires a lot of adjustment and it's where you really play "poker".

 

I haven't played much in the past 2 years, but I usually play one on one poker tournaments (heads up). Played various limits from $3 to $50 games. That game requires you to play the player, not the cards. So you may be able to wait for strong hands against a passive player, or play aggressively against tricky players.

 

 

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