SumGames - Poker (and how it compares to investing)


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     Poker is possibly the most comparable casino game to the stock market. According to Dan Kadlec, in Attack of the Math Brats (6/28/2010) from Time, "an estimated 33 million Americans over 21 played poker in person or online in 2009 for fun or money. In the past eight years, the global online-poker market, measured by the revenue of poker websites, has gone from almost zero to $4.9 billion in 2009 despite a vigorous anti-online-gambling lobby that has slowed the growth of the industry in the U.S." Thousands from around the world every July travel to Las Vegas for the World Series of Poker to play Texas hold 'em, the most popular poker game in the world, accounting for 87% of online play, according to

     Imagine taking a trip to Las Vegas, where you enter the newest multi-billion dollar casino resort. Walking through the resort, as you gaze at the amazing man-made scenery you find yourself at the entrance to the poker room. In front of you are two poker tables. At one you hear idle chatter and occasional laughter. A passer-by whispers to you, "do you know who these people are?" You say, "no, who are they?" Your new friend informs you that sitting at the table are nine of the most successful poker players in history. Imagine Doyle Brunson, Johnny Chan, Chris Ferguson, Gus Hansen, Phil Hellmuth, Phil Ivey, Howard Lederer, Mike Matusow, and Daniel Negreanu are playing poker just a few feet away from you.

     At the other table is a group of players wearing expensive clothes and enough bling to nearly blind you. You notice several waitresses flirting with the players and continuously bringing them shots of hard liquor. Your friend explains this is the celebrity table. They are all rich and famous and have all expressed interest in beating their fellow celebrities, or losing a ton of money in the process. Each time the waitress drops off a drink, the players tip the waitress with what looks like large bills and they make some kind of comment like keep em' coming. The players are all loud and laughing. And each time a player wins a hand he tosses some chips to the dealer. Clearly the players are all drunk far beyond the legal driving limit, but they are all having fun and laughing and seem to be pocket-less with unlimited bank rolls.

     Then one person at the drunk celebrity table falls over and passes out. At the same time one person at the professional table busts out, congratulates his opponents and walks away. One person at each table looks at you and says "we have a seat for you if you'd like to join us?" Do you sit down and start playing at one of the tables? If so, which one?

     Investors would love to imagine that trading in the securities markets is similar to sitting down and playing poker with rich drunks. Unfortunately, the reality is it is much closer to sitting down to play poker with a bunch of world champions. There tends to be one or more pros at any given table in Vegas, or trading any given security. And recently as high frequency trading has increased, you are likely up against a sophisticated computer program that operates at light speed.

Whenever you buy or sell a stock or bond, there is someone on the other side of that trade, and that someone most likely has a name like Goldman Sachs, PIMCO, or Warren Buffett. There is even something worse than trading with Buffett, and that is trading with a top executive of the company whose stock you are buying or selling, and who likely knows more about its condition and prospects than even the smartest and best-informed security analyst.
William Bernstein in The Investor's Manifesto



Gary Karz, CFA
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