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Passive vs. Active Management:
How investing is – and isn't – like a game of Texas Hold 'Em (cont.)
[Download Printable White Paper]
Over this time, he's adapted a number of his own
"rules of the road" which provide an enlightening view
of poker
and his investment strategy.
Rule No. 1:
Winning consistently at poker isn't about taking risks.
It's about systematically minimizing risks.
As you may know, No Limit Texas Hold 'Em is something
of a national craze right now. It's on ESPN and other
channels regularly (thanks to a camera that allows you
to see a player's hole cards). NOTE: Casinos and
off-shore internet-gaming comprise a spectacular growth
industry that has been the subject of much moralizing
and analysis. But gaming as a sector is another story.
Here we're discussing "gaming theory" and how it
pertains to you.
Briefly, here's how No Limit Hold 'Em works. As the
professionals say, it takes a few minutes to learn
and a lifetime to master.
Two "hole" cards are dealt face-down to each player.
These two cards are yours exclusively.
Then a succession of five "community cards" are dealt
face-up in the center of the table three at once (called
the "flop"), then a fourth card, and finally a "river"
card which players use with their two "hole" cards to
make their best 5-card poker hand.
These cards are "your market" for any given hand,
Pete says.
Betting ensues. Players fold, raise, call, re-raise
and occasionally go "all-in" (betting all their chips)
all the while attempting to "read" the situation, and
each other, for information or "tells." Action at
the table would seem the farthest thing from steady,
principled investing.
Except for the decision-making process.
"Anybody can play aggressively and at times, in
poker, you have to," he said. "But if that's your core
strategy, you'll be at Losers Anonymous by the
weekend."
"This game is about taking what you know and
quantifying the probabilities, correctly figuring the
number of potential 'outs' you've got
and the outs
your opponent has
systematically minimizing the
risk.
"It's about not taking the huge gamble if you can
avoid it."
"When players make mistakes, they're usually counting
errors, math errors," he said. "But still
you can run
the numbers perfectly and get a bad beat every once
in a while. That's poker."
In other words: the overriding element in common
between stock markets and poker is that in both
scenarios "players" must operate with incomplete
information.
(cont.)
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