What Poker has Taught Me About Gambling (Elsewhere)
If you looked far enough into the past, you’d find a bright eyed and bushy tailed Pickleman, entranced by the potential of poker and gunning for the big win. Readers of my column will have seen how, over the years, with the publication of article series such as I’d Rather be Lucky than Good and How Prediction in Poker Should be Scientific (part 1 and part 2), I’ve written more about the gambling side of poker, and become less convinced by poker’s success stories. I still firmly believe that there is money to be made in the game, but I consistently maintain that to be realistic about your chances, you have to take a very long view.
My views have been informed not just by playing a lot of poker, but by research both inside and outside the game. In earlier articles, some of my mathematical modelling came up with conclusions which I did not believe (through lack of experience). Only subsequently, after players had posted millions of hands in results on forums, did practice seem to echo theory. Disheartening, but also sobering.
The work outside of poker which I would most recommend to players is that of Nicholas Nassim Taleb, in particular Black Swan and Fooled By Randomness. As I say, it took years for me to realise that not every poker player who posts scintillating results is a great player – in many cases we are, as the book title suggests, fooled by randomness. The application of this wisdom to areas such as the stock market and the business world made sense, but it was only after 2008 that Taleb’s warnings hit home.
My eureka moment about stocks and shares came last year when I realised that I was paying £45 per year to my stockbroker just to keep a stocks and shares account open. I was paying even more to keep funds in my portfolio – usually 1% of the capital amount per annum as a management fee.
The epiphany was twofold: first, I realised that these management fees were exactly like the house taking a rake in poker: winning from me whether my stocks won or lost. The second was my realisation that – at least where the stockmarket was concerned – I didn’t have a clue what I was doing.
In poker, I can traipse home after every bust out, analyse my maths, go over the hands with my mates, and conclude that for the most part I was playing money making poker, but was just the wrong side of luck. Could I do the same with the stock market? Could I heck!
As I considered the years of work which I put into poker – reading books, analysing databases, discussing hands – it became clear that I had done enough to trust that I knew what I was doing. Even so, I followed strict bankroll management principles, and viewed the entire enterprise (especially live tournaments) as a bit of a gamble, which, hopefully over a number of years, would prove a money winner.
What the hell did I know about stocks and shares?! And yet, I had quite confidently invested thousands per annum on stocks which for all I knew were the conceptual equivalent of chasing a flush draw. The government even gave implied guidelines as to how much they figured was a reasonable amount to invest – the ISA limit being somewhere between six to ten grand per annum in recent years.
Sure, I hear you say, but you can do the “fool” thing and just invest in the FTSE, knowing that over the years this will eventually creep up. Well, that’s been true of previous decades, but if you’d bought the FTSE in the year 2000, you’d still be waiting to break even, and may yet wait another five years or more to do so. That twenty year period is a significant part of anyone’s life, so perhaps even the most basic and sure fire money making strategy in the stock market suffers from poker’s biggest variance demon: you won’t live long enough to reach the long run.
The epiphany was enough to make me sell all my shares. Frankly, in comparison with all that I knew in poker, my knowledge of the stock market, and especially the fundamentals of the businesses I was investing in, was woeful (is this stock underpriced? Do I know something the market doesn’t?). I might just as well take my £5k ISA allowance to Vegas each year and play 20 Venetian DSE events with it. At least I know that – variance aside – it’s an investment with an edge.
So now I’m basically stockless. I realise that, where financial markets are concerned, I’m just another fish, chasing a draw and chancing my arm. I’m thankful to poker, because the years of practice of battling with variance and endeavouring to improve my game have shown me just how good you have to be to have an edge in a market where there’s a lot of gamble.
For example, whenever I talk to Neil Channing about sports betting, his language is invariably nothing to do with whether a particular horse suits certain conditions, or a team is on a good run, etc. It’s simply about whether the person setting the odds has missed a trick or not. That’s the currency Neil trades in where sports betting is concerned. And if you think about it, that’s precisely what’s happening when I buy or sell a stock: I’m not researched enough; I’m over-exposed and under-informed. Just like all the other fish.
So my conclusion is this: invest in what you know best. Even if that’s something as parochial as selling ice creams to the tourists at the beach. To be honest, over the next ten years, with the recession looming larger, investing in yourself may well be the wisest move you can make. Sure, it’s a gamble – it’s all a gamble – but at least with that gamble, you’re giving yourself a decent edge.