Investing - Poker versus Stocks

So, in 1999, when I was a waiter at Spago's, I took my lunch break reading about stocks and investing.  Even though I had read a ton, I still had no clue what a good investment strategy was.  I saved up $10,000 to invest and thought I would test the waters.  I met a broker at Wells Fargo and listened to his pitch, investing $1000.  After about 2 or 3 months, that $1000 had doubled with my investment.  No, kidding, I was going money eyed, like Scrooge McDuck.  So what did I do, I invested the rest of the $10,000.  Later, this amount dropped to $7000 or so, and I decided to let the money sit.  After he realized I had no more money, he transfered my account to an online brokerage.  About 2 years, later, the fund was stagnant and Wells Fargo online changed their policy and I was chared $200 in brokerage fees.

I sold the Mutual Fund, placed an automatic trade ($25) every quarter to avoid fees and decided to try to pick some stocks and sit with them.  Over about 10 years, I can say that I've lost about $7500.  I now sit with a low fee, passive index fund, that tries to hold the top 500 stocks from the S & P.  Of course I have my 401K in a 50% 50% split between bonds and a mid cap fund.

What are my mistakes?

1.  Well, first of all, I thought a broker at Wells Fargo, would have any clue what he was talking about.  The goal for any bank is to give their pitch and make sure a trade occurs.  They make their money off of transactions.  Even reading this blog, you will probably go out and buy some stocks, even though I am telling you I lost $7500.  That is the purpose of CNN, the stock tickers, the shows on TV, the millions of ways to invest money, etc.  And trust me, you will invest your money in these at one point or another.

2.  Not having a clue what I was investing in.  Just trusting someone else to make money, without even knowing the fees involved in the transaction.

3.  Picking a stock because I thought the company looked good and made a good product.  Even with my index fund, which is supposedly safe, I really have no clue why the fund is doing what it is doing.  Picking stocks the way I have is like throwing a dart at a dart board.  Without a lot of valid research, this really is just gambling.  Buffet, a great value investor, once said he will only find 1 or 2 stocks the whole year.  Researching the whole year to find a stock.  We will definitely know when we want to buy, spend maybe 2 days at most, thinking about whether we want to buy.

4.  Playing into the Ponzi scheme.  I invested my $1000 had it doubled and immediately, put a bunch more money in.  That is exactly what a Ponzi scheme expects.

Now, let me give you a flip side.  In 2005, I started playing poker.  Basically, my strategy was an aggressive style and I attempted to be patient and go all in when I had an excellent hand.  This is called hard ball poker.  My first tournament, I bought in for $35 or so, with 5 or 6 tables and won the whole thing!  I got $535, which I tipped $35 off of.  I played $8-$16 that night and lost it all.  My family was not with me, as I had to get a summer job in a separate city and I had a week to start work.  I managed my money great, and moved down to lower limits, learning anything I could.  I was up about $700 after that first week (not counting gas, food).  I remember many hands from that first week.  The first was a flush versus flush, which had happened several times, but it was hard for me to read the hands as fast as the dealer was dealing.  I had seen several pot splits and I protested that we both had flushes so we should split the pot.  Luckily, it was limit since my strategy was to bet my shirt on any flush or full house.  Another protest was when I had 2 pair and another person had 3 of a kind.  I had been playing my 3 of a kinds weak, previous to that hand, thinking it was not that great.  The final hand, was when I had 4 of a kind.  I had four 4s and there were 2 sevens and 2 fours on the board, meaning the other guy could have a 7 for a full house or two sevens for four of a kind.  I sat thinking and thinking about whether to raise or just call.  Finally, I decided to raise.  Basically, we had capped all betting on all rounds.  Four of a kind, and I was thinking.

Anyways, I kept playing on and off and reading many books and trying different things.  I learned about how to small ball, which meant to risk very little.  The basic strategy here is to win lots of little pots by constantly raising pre-flop, in position to minimize the field to 2 or 3 players.  Then, bet out a lot after the flop.  You lose several medium pots, by controlling the pot size and checking with things like top pair on the turn, possibly inducing a bluff on the river or getting away cheap against a strong hand.  You win a few large pots because of all your aggression, people just don't believe it when you have an awesome hand.  They walk away saying, man this guy is terrible, always putting his money at risk and he still gets lucky.

Out of 10 players, I might only be better than 1 or 2 at the table.  However, that is all I needed.  If I ever tried to take on everyone, I would lose my shirt.

Over the long haul, I was at about $8,100.  BTW, I recently quit playing, due to the time and effort I was using and taking away from family.  The best book I ever read was Ace on the River by Barry Greenstein.  If you want me to sum it up, he dropped out of his PhD, lost his family and became a millionaire.  Somehow, subconsciously, my ordering represents my actual priorities.

I've never lived near a Casino (good thing), so most of the year, I would not play, except possibly online. Literally, at a Friday night home game with some friends, I would feel bad winning and move all in pre-flop with 97 off to try not to take their money. Here, there may be 10 players and maybe 2 or 3 could match up to me (or better). Remember, having 2 worse in this crowd is enough to make money.

I wish I had exact numbers, but about a year before I finished my PhD, I lost my excel spread sheets as my hard drive crashed.  Luckily, I just had to retype a bunch of stuff, since I had been e-mailing my advisor my work.  Back to the story.  Now wait a minute, how does this guy invest in stocks and lose $7500, yet gamble and win $8100?  What is the point of this story?

1.  One major difference is that I was highly educated in poker, yet had just a brief education in stocks.  For me, the gamble was the stocks and the poker was skillful.

2.  I managed my money well.  With stocks, balancing is an important part of the investment game and managing money is very important.  With poker, I would drop limits to limits I could beat.  Anytime I went up limits, I always dropped limits before I lost whatever I won.

So after all that, what did I learn.  I learned that poker is not gambling in the short term, but requires full attention and thousands of hours to master.  Even at a masters level (okay ignore extreme cases), one can only make about $50,000 a year, grinding 80 hours a week.  Do yourself a favor, get an education and make twice that.

Stocks, also require a smart investment strategy.  If you are not willing to put 100s of hours in to learn, you are just gambling.  Don't listen to advice people give you, learn for yourself.  People make money in the stock market by making the right decision against popular belief.  In fact, it is better to think of the stock market as a gamble between two people, since there is always someone on the other end of the stock, losing money.

This post was reposted from http://sizuservices.blogspot.com/2010/08/investing-poker-versus-stocks.html, originally written on August 8th, 2010.