It's time for poker players to start putting their money to work.

[grapevinekid]

Scorpion Man: Have you read "The Little Book that Beats the Market"? If so, what are your thoughts?

This book turned me on to a couple of stocks that I bought a couple of mos ago and am pretty bullish about. They are PWEI and AH.

I also have long positions in COP(just under 59 base) and ESV(just under 42 base) which I bought as value plays a couple of mos ago and recently bought NEW just under 39 which probably is my riskiest holding although I feel the dividend and a stop loss order around 30 greatly reduces that risk.

I'd be interested to know if you have strong opinions on any of these stocks. With falling oil prices, I recently sold EGY to reduce my exposure there but I've debated whether I should hold COP and ESV or look to diversify more.

I've read "Hedge Hogging" by Barton Biggs and I'd have to agree with your stmt that most top talent at the mutual funds is fleeing for hedge funds. And, my 401(k) returns this yr certainly have given me no reason to dispute that stmt. With that in mind, I'd be interested to know your recommended asset allocation for a guy like myself in his mid 30s who would like to retire before the age of 60.

[rwesty]

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I actually think that poker has more to do with investing than trading, but I might be in a minority there.

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I agree with this.

[DesertCat]

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Beta is a product of the CAPM and shows how risky a stock is when held in a diversified portfolio.

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I don't have much to add to this very entertaining thread except my standard comment. To paraphrase Warren Buffett (and Charlie Munger) beta ain't a measure of risk, and CAPM is pure "twaddle". If you want to be a successful investor, you should understand why Buffett and Munger believe this. If you want to pass a finance class, just ignore them (and the rest of the real world), it'll make your professor happier.

[RedJoker]

Scorpion Man, thank you for all the support and fantastic examples.

I was trading before I started college so I had never heard of CAPM or EMH then. I cited them because I thought it was relevant to the discussion of Beta and how stocks are priced. When I first heard them I failed to see any practical use for investing, and I still don’t. Just my humble opinion.

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Debt...good or bad?...its a trick question...the answer is yes.

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Oh you sneaky ....... I’ll have to start thinking outside the box from now on.

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House appreciates 10%. We go to sell. You are up 10%. I am up 100%. Get it?

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Yes; I do. Same thing as using margin, options and LEAPs, when you’re right you can be VERY right.

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I assume you have taken calculus, but first derivative is rate of change and second derivative is rate of change of rate of change (i hope..its been 20 years for me).

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Nope; calculus hasn’t changed [img]/images/graemlins/smile.gif[/img]. I think my AMZN example applies so, no matter how badly explained it was.

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On revenues...that was where we spent most of our time...figuring out if the street expectations for revenues and earnings were correct or not. That is where the rubber meets the road.

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How can you be sure that your projections are any more accurate than the analysts? Obviously it is an imperfect science but wouldn’t large corporations with teams of analysts have an advantage over the hedge fund operator or does the hedge fund operator have a greater talent (which explains the 10 figure salary)?

Also, what’s your opinion of technical analysis, do you/did you use it and if so, how?

[lastchance]

1: Great thread.
2: What does it take to consistently beat the stock market (picking)? My parents have definitely made a good living over the years, getting out before the bubble, and according to them, they've beaten the S&P over the past ten or so years, and I don't doubt it. However, I can't help thinking they luckboxed their way into it. A poker analogy in your answer would be really nice.

[snappo]

Scorpion,

Which books you would recommend for a beginner who wants to learn to actively invest, ie learn to pick stocks?

Thanks,
Snappo

PS. I have read all your posts since you started posting on this forum, and you are clearly extremely skilled/talented at investing and stock picking. Just want to say thanks for taking the time to help us out.

[Scorpion Man]

Why I think poker is relevant to being an investor (not irrelevant to trading, btw…I just think its excellent for investing)

1. Reading tells. Non professional investors do not understand that hundreds of millions of dollars are moved after a single meeting with top management, often on very subtle interpretation of what is said and how.
2. Understanding risk/reward. You can be a great investor and be wrong as often as right…its just key to be right big and wrong small.
3. Not going on tilt, withstanding negative variance. Investing is a wildly emotional business for most people. If you allow these emotions to affect your decision making its very expensive. I have seen it ruin careers.
4. Pattern recognition (I believe this is numero uno). Stocks, like poker, lend themselves to saying “when this set of events/circumstances/factors converge…the outcome is generally xxx.” This was my strongest skill as an investor.
5. Math. Nice, but not crucial.
6. Related to #3…ability to handle losing on a constant basis (gross losses, not net).
7. Comfort and skill in making decisions in an environment of partial information.
8. Intellectual arrogance…by this I mean that the best investors’ believe that they have the ability to see things more clearly than others and can make money despite the Efficient Market Hypothesis…you have to think you are just flat out smarter than most of the other people in the market. You have to have this confidence in poker, too (I understand it’s a fine line between reckless arrogance and confidence...)

[Scorpion Man]

On technical analysis, I will use a term I just learned at 2+2 = "MEH". I don't find it useful in the way its generally used. I am sure TONS of people will disagree and I don't even care to argue the point...there is more than one way to skin the cat in the stock market. That said, there are a few "patterns" that, when married with what was actually going on at the company, were definitely worth looking for. As just one example, I would say the most prominent of these is a stock that has gone through a meaningful decline, has based for a significant period (at least 6 mos...but the longer the better and if its years that's terrific) and the FUNDAMENTALS OF THE BUSINESS ARE EXHIBITING A POSITIVE SECOND DERIVATIVE CHANGE. This is the best turnaround setup.

In general, however, I have no patience for the 200 day, 50 day, blah blah blah. I have not seen people make a lot of money using this stuff...it is also more of a trading strategy than an investing strategy. I don't want that statement to be too blanket though. Relative stregth, for example, is an important tool in understanding how a sector or stock is performing, etc. I am just not a big fan of drawing trendlines. I have seen them abused more often than a catholic schoolboy.

On the whole "large corporations" and "teams of analysts"...That is a frequent refrain I had heard for years. Its a long answer and people have to be oh so overtired of reading this stuff...but I will give it a brief shot. If by "large corp" you mean Goldman, Morgan, and all the sellside investment banks...hah! You ever watch Vince van Patten give poker analysis? very similar situation, except he is better looking. Life is about incentives...and the incentives (this is complicated because it has changed over time as the regulatory regime has changed) of these analysts to make money NEVER INCLUDED BEING RIGHT. It was simply unimportant to them getting rich. So, in addition to being very mediocre intellects (which most of them were when I was in the business, for the very reason that nobody the best people do not become associates for sell side analysts -- its a crap job -- and when their bosses leave, they get promoted.) their incentives, historically were
#1 bring in investment banking deals - this was done by kissing the aholes of the companies they covered
#2 become popular with "buysiders"; primarily mutual fund managers...this was mostly about getting good tickets to games, bringing tasty sandwiches to meetings and making sure that if a given management team were in town that you got the meeting. Also very much about returning calls quickly and at any hour of the day.
#3 Its a sales and marketing job. There is very little freaking research done by "research analysts". They are way too busy talking to people on Wall Street to stay popular to actually go out and do work so that when they are talking what they say means very much.
#4 The vast majority of sellsiders have 0% (historically at least...I can't speak to recent changes) of their compensation tied to being RIGHT. For chrissakes ... being right was like the last thing their employers cared about! Actually, being negative and right was MUCH worse than being positive and wrong...and I mean by an order of magnitude.


Soooooo.....sellside analysts are greedy, lame-o, intellectually mediocre, inexperienced shills...capiche?

This is too long, but for very many years hedge fund guys just worked much harder and cared much more and were much smarter than the mutual fund guys. There was a key reason for this...we kept 20% of the profits. The mutual fund guys mostly were trying to keep their jobs and usually got 0% of the profits. And the game keeps changing. When I started, it was pretty easy...you picked up the phone, called the CFO and asked "Are you guys gonna beat the quarter" (it was a little more artful than this, but let's this is not that far off). Today its tougher and people pay for access for all kind of exotic info. There was one large hedge fund that had a guy stationed in taiwan taking the plant managers to strip clubs and finding out how the wafer starts were for the chip business...its really that broad a swath of tactics.

Life is about incentives. People do what is in their own best interests (except for me, who for some reason is sitting here typing this).

[Scorpion Man]

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Buying individual stocks is too risky to be done with money crucial to your retirement. If you think you have a talent for picking stocks, you probably want to put 80% of your savings into a diversified portfolio of non-correlated assets (think domestic and foreign stocks, real estate, bonds, commodities). Dollar cost average into your positions and rebalance once a year.
Then try picking stocks with your remaining 20%. If you are good at it, you're individual stock selections' returns will quickly surpass your earnings from your safe money.

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I don't agree with this...in your 20s there is no such thing as money that is crucial to your retirement.

Now, buying stocks when you have no idea what you are doing is another matter entirely.

[Scorpion Man]

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I am 26 and just graduated from law school. I work at a firm and have a pretty solid salary which is supplmented nicely by poker. I have about $18k in an emigrantdirect account on top of my poker BR.

I'm going to start contributing to my firms 401k (I think they match up to 12% - so I plan on doing the full amount) and then was thinking of doing an IRA. What else should I be considering as far as other investments? Is what I'm doing good so far?

I've been reading the book "The only investment guide you'll ever need" by Tobias and it has been a nice foundation. Do you recommend any other books?

Thanks!

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Getting full match is a must, so good start.
Generally, tax deferred money is better. Only issue with it is you lose flexibility. That said, you can borrow from yourself for certain things like education or buying a home (I am not a financial planner I generally understand these issues but that is not where I spent my time).

Getting started with indexes as recommended by many in this forum is the easiest way to start. Real estate has been a monster for a long time, but it's not clear where we go from here. Obviously, leaving money at emigrant is not going to get you anwhere in terms of capital appreciation.

IMO, stocks will be better than real estate over the next 5 years, depending on what kind of leverage you use.

Books...hmmm I think there are whole threads on that subject, but as I posted elsewhere, I have never seen anything as good as Classics: An investor's anthology , compiled by charlie ellis. Its been awhile since i read it; i cannot remember if its too advances for a beginner but its about the greatest collection of investment thoughts I have ever seen.

As a gross intro you can read Peter Lynch's One up on wall street...however, I hated that book. It oversimplifies things and the world has changed since he wrote it.

There are some good threads in this forum on books...I don't know any beginning "how to" investment books because I never read them. The stuff I like is Manias, Panics and Crashes by Kindleberger and books like that...they give you historical perspective, which is very important. Also "Buffet" by Lowenstein is great book.

THis is a very very partial list.