Nice post on gambling v securities markets

[NajdorfDefense]

"More than a few times when I've told someone what I do for a living, they've scoffed and called me a "professional gambler." And while I hope few people really think of Wall Street as nothing more than a giant casino, there is an inescapable link between investing and gambling. I have yet to find a trading desk where the betting action wasn't rampant. Hell, the most famous book about the bond market is titled "Liar's Poker" and features a story about John Meriwether playing a game of liar's poker for $1 million.


It isn't hard to see why a professional securities trader would have the same psychological profile as an avid gambler. You have to be decisive. You have to accept risk. You have to understand that luck will be a big part of your success or failure on any given bet.


I myself was very much into gambling on NFL games as far back as high school. While I never had a large amount of money on a game, and it was mostly just in the form of a pool among my friends, I learned a lot about investing and trading through gambling on football.


Focus on the primary factors, don't get distracted by secondary and tertiary elements. By this I mean, focus on which team is more talented than the other. Only if you think the talent level is very close should you start drilling down to stuff like matchups and weather conditions and minor injuries. Sometimes the secondary and tertiary factors can talk you out of making a good bet, or talk you into making a bad bet.


Same goes in investing. Focus on the fundamentals of a company. Only after you've completely analyzed the fundamentals should you drill down to things like technicals of the trading price or potential EPS surprises. The firm with better management and a better business model will win out most of the time, even if you completely miss-time the trade. Just as the more talented football team will win most of the time.


Filter out irrelevant information. All the time you hear about how this team has beaten that team 6 out of their last 9 matchups or some such. But in the NFL, non-division teams don't play each other every year. So 9 matchups might be over a 12 year period. Is there any relevance to the fact that the Raiders beat the Colts several times in the late 90's?


Similar crapola gets thrown out in the investment world. Back in 2000, I remember people claiming that technology stocks do well in recessions. So while every one saw the economy was slowing in late 2000, technology was supposedly a "defensive" way to play the recession. Mmmmm... didn't work out too well. The fact is that each recession plays out a little different, just like each boom plays out a little different. The economic fundamentals are never exactly the same. Just like the Colts are a very different team today vs. 1995, the economy is different today than the last time we had a recession.


Ignore the media as best you can. This is really a corollary to the first two points, because the media loves to focus of secondary factors and throw out meaningless statistics. Watch any NFL pregame show this Sunday. 80% of the talk will be focused on worthless banter about who wants it more or what stadium is tough to play in or which player is a great leader or who's mentally tough or who owns who or who is inspired by some personal problem or which coach is a genius or who's reeling from their last loss etc. etc. Remarkably little time is spent talking about who is more talented than who.

They'll also vastly overweight what just happened last week. If a good team starts 2-1 then loses in week 4, invariably there will be a story on ESPN about whether its time for that team to panic. Meanwhile if an average team starts 1-2 and wins in week 4, invariably ESPN will do a story about whether that team is a legitimate title contender. Especially if the average team beats a pretty good team. You just wait: this Sunday is week 4 and I promise you both stories will run on Sportscenter or one of ESPN's other NFL shows at some point this week.

The financial media is similarly obsessed with the recent past. Since the dollar has recently been dropping, there's also been a rash of stories in the press about how to play a falling dollar. Its possible articles like this have something to do with why retail investors are constantly getting whipsawed.

When someone like CNBC interviews a PM, they will invariably ask what stocks the PM likes "in today's market." Of course, CNBC means literally today's market. And yet if you listen carefully to the answer, the stocks and reasons often have little to do with today's market. Just the other day I was listening to Squawk Box and some PM said he liked pharma stocks because of demographic issues. Well that probably means the guy has been holding those stocks for years. Today's market? Very few PM's buy stocks or bonds based on where they think the market is going this week.

Forget about what's possible, concentrate on what's probable. Is it possible that the Rams will upset the Cowboys later today. Sure, its possible. Anything is possible. But if you go through the scenarios of what it would take for St. Louis to score that upset, you'll realize the odds are low.

Similar with investing. You can talk yourself out of good investments by over-weighting disaster scenarios. Investing and betting are both about probabilities.

When you lose, understand why you lost. Sometimes you are just unlucky. In fact, you'll wind up being unlucky a lot if you hang around either the investing or sports gambling game long enough.

So when you make a bet or a trade that doesn't work, first figure out if you were just unlucky. If whatever went against you was a possibility you considered, but estimated to be a low probability, maybe its just an example of things not breaking your way.

Remember that the point of examining your mistakes is to learn from them. So don't stop at small picture reasons why the trade didn't work. Often times the more specific your reasons the less applicable to other trades. Take Enron. You could conclude that it was just fraud. But that's not too applicable to other trades, because fraud is extremely hard to detect. Or you could conclude that you need to look harder at off-balance sheet funding. Better. But even better would be to watch out for aggressive management. The more aggressive managers are more likely to push hard for better quarterly numbers. The harder they push, the more tempting fraud becomes.

Don't get lured by the big spread. Whether its a team favored by 16 or an A-rated bond with a 250 spread, it can be tempting to conclude that the spread alone makes the bet worth it. That kind of thinking leads to lawyer analysis. Lawyers are charged with representing their client, and therefore they gather and/or interpret evidence which supports their client's position. The truth isn't a lawyer's problem. People all too often make betting decisions with a conclusion in mind at the beginning, then overweight evidence that supports their decision and ignore contradicting evidence. What a great way to lose money!

Remember the point is to make money, not to be a hero. People love to make bets that, if they pay out, make the better look like a genius. But usually these bets are highly risky. Like taking the 30-1 shot to win the Super Bowl or betting on an 11 point underdog to win outright. Or buying a deep out of the money option. Or buying a bond with a $50 price. If you want to make a bet like that, fine, but make sure you are doing it because you've completed an exhaustive analysis. Not because you want to be a hero."

http://accruedint.blogspot.com/2007/...drel-youd.html

[rush66]

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They'll also vastly overweight what just happened last week. If a good team starts 2-1 then loses in week 4, invariably there will be a story on ESPN about whether its time for that team to panic. Meanwhile if an average team starts 1-2 and wins in week 4, invariably ESPN will do a story about whether that team is a legitimate title contender. Especially if the average team beats a pretty good team. You just wait: this Sunday is week 4 and I promise you both stories will run on Sportscenter or one of ESPN's other NFL shows at some point this week.


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Sounds a lot like tonight to me.

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Remember the point is to make money, not to be a hero. People love to make bets that, if they pay out, make the better look like a genius. But usually these bets are highly risky. Like taking the 30-1 shot to win the Super Bowl or betting on an 11 point underdog to win outright. Or buying a deep out of the money option. Or buying a bond with a $50 price. If you want to make a bet like that, fine, but make sure you are doing it because you've completed an exhaustive analysis. Not because you want to be a hero."

[/ QUOTE ]

Bingo.

Thanks for the post naj. I like it a lot.

[dgratz]

Thread's like this make me wish you guys had the clapping smiley faces, very nice post.

[thelyingthief]

yeah, well, one has a -4.54 ME built in at the outset, the other a + 12.5 ME, and baby, THAT'S A BIG DIFFERENCE.

it's hard to overestimate Pittsburgh Phil's caveat about speculation of any kind, but it applies particularly to these negative ME situations: almost everyone believes themselves capable of playing a market, and discounts the need for a special talent in their evaluation altogether.

personally, i don't think one has to be very astute about the securities markets, since by random selection a profit is assured (note, i do not mean to de-emphasize the risk); one certainly needs an extra something, well beyond mere analysis, to succeed even modestly in sports gambling adventures.

tlt

[ensign_lee]

This is a fantastic post.

[sirio11]

Excellent post, thanks for sharing Najdor

[Grasshopp3r]

Good analysis.

One of the key distinctions between most betting and investing is the time that you have in the investment versus just betting the event. Time has a way of bailing out poor investment decisions, but most traders are not long term investors, either.

[NajdorfDefense]

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personally, i don't think one has to be very astute about the securities markets, since by random selection a profit is assured

[/ QUOTE ]

That is flatly absurd. Bond, commodities, options, and FX-markets are all negative-sum markets.

ocd: Meriwether famously didn't play for $1mm, and in fact counter-suggested playing Liar's Poker to his boss for $10mm [20 years ago!], the author of the post made a small error, thus missing the main point of Meriwether's prowess at reading people and managing risk.

[thelyingthief]

please note: bonds are not securities, nor are options, and certainly not the financials.

so, READ the posts, at least, before shouting out loud, ok?

[MrFeelNothin]

[ QUOTE ]
please note: bonds are not securities, nor are options, and certainly not the financials.

so, READ the posts, at least, before shouting out loud, ok?

[/ QUOTE ]

OK, I'll READ the post.

If you profit but at a rate lower than the market, YOU LOSE. Its all relative.