Article Comparing Gambling and Investing

[joesxm3]

This was posted on the poker forum I read. I thought some might find it interesting.

http://www.leggmason.com/funds/knowledge/mauboussin/Mauboussin_052804.pdf

 

[haha]

Excellent article. Most index/asset allocation investors seem to understand the pivotal importance of controlling the vigorish or rake or cost. But I think they are real holes in the general understanding of expectation. If a cautionary note might be sounded frequently the response is, "Yeah, but look at how much I have made since xx/xx/xxxx." In the argot of this article, this is focusing on results, not process.

Results tell what happened. But those outcomes may never happen again, or if they do the payoffs might have changed. What investors need to try to estimate is what odds are being offered for what outcomes? And what probabilities attach to those outcomes?

ha

 

[joesxm3]

I have been studying poker about 3 years. I think I am learning a lot by playing poker that better helps me understand investment concepts - mainly in the areas of probabilities vs risk and having the discipline to follow a strategy.

I don't actively trade stocks, but a lot of the skills seem to overlap. I read this book a while ago. It covers the topic of managing probabilities and sticking to a strategy, even to the point of randomly buying stocks and running winners hile cutting losses and still making money. I found it really interesting.
Amazon.com: Trade Your Way to Financial Freedom: Books: Van K. Tharp

 

[haha]

I have been studying poker about 3 years. I think I am learning a lot by playing poker that better helps me understand investment concepts - mainly in the areas of probabilities vs risk and having the discipline to follow a strategy.

I don't actively trade stocks, but a lot of the skills seem to overlap. I read this book a while ago. It covers the topic of managing probabilities and sticking to a strategy, even to the point of randomly buying stocks and running winners hile cutting losses and still making money. I found it really interesting.
Amazon.com: Trade Your Way to Financial Freedom: Books: Van K. Tharp

Long term, I don't think that strategy can work. It may work to some extent with commodities. But usually there will be enough random movement to sink those filter rule strategies, which is what you are talking about.

I think you have to study and have an opinion. Then take a position hoping to keep it a while. I rarely if ever sell a stock becaue it has gone down. Usually I buy them in part becaue they have gone down- how would the stock know that it had better stop going down now that I have taken a position?

My damage control is usually from very careful research, plus diversification. I am not afraid to heavily overweight a sector, but I usually try to avoid overweighting an individual security, Unfortunately sometimes I screw up on that last one.

Ha

 

[pedorrero]

I'm no expert, just well read. The consensus is that traders usually lose their ass. There, a bit more blunt than "sink those strategies." Usually a book or TV show that says, "You can't beat the odds or averages, so bet average (e.g. index fund)" is not going to get good ratings. And it is, of course, true that someone can or does beat the odds with their gambling or investing system. What is seldom said is that they are one in a million. We can't all be a the high end of the bell curve.

Interesting aside: when options were first invented, the government had to pass a special law to say that they were not a wager (e.g. gambling.) So sure, there is a overlap between gambling and investing.