Poker and the Markets

Professional poker is not a gamble, when one takes a large sample-size of many, many hands into consideration. 

On the other hand, non-pro poker is more likely a gamble. 

So, what’s the difference between professional poker and non-pro poker?

Strategy.

Players make “mistakes”. 

Mistakes cause losses. Lets define “mistake” here as anything that causes loss. 

Winning players strategize in such a manner, that their mistakes make them lesser than average losses, and sometimes, no losses at all, but even a win results. 

Reads, bluffs, meta-game, what have you,…

…the reason the player is a winner is that he or she is winning even with hands that would normally cause a loss.

Also, when the pro senses a winning hand, the pro bets big because the odds are in his or her favour, and the pro would like to capitalize, given the odds.

A few big wins coupled with many small losses, whereby the sum total of all losses is lesser than the sum total of the wins – that’s a winning combination. 

Let’s just take this element of the winning combination, and see how it’s implementable in the markets.

Market play means mistakes. 

Almost all the time, we’re making mistakes while we’re attempting market action.

However, because of our due diligence, we make intelligent moves too. 

Our intelligent play wins us money. 

Our mistakes lose us money. 

How do we let our mistakes lose less money?

By having a very small entry quantum each time. 

How do we allow our intelligent moves to win big?

By not nipping a winner in the bud. Also, by putting money into the winner when it dips, and at an appropriate entry level.

What do we have here, then?

Many small mistakes, and a few big wins, whereby the sum total of the mistakes is lesser than the sum total of the wins.

This is the same winning combination we discussed above.

Voilà.

🙂

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Benefit from a Small Entry Quantum

You enter the markets with an amount each time. 

That’s your selected quantum. 

The idea that’s being discussed here is as follows. 

Enter the market as many times as you want. 

Just do one thing before that. 

Adjust your quantum level to a point where it doesn’t pinch you, and…

… such that any entry mistakes make themselves felt only minimally, seen from an overall perspective.

In other words, keep your quantum of entry small.

Also, keep it constant, so that overall errors and benefits are able to average out in the long run.

Let’s get some picturization into play, to elucidate the concept. 

Let us assume that you wish to buy stock X for the long term, and you’ve decided upon staggered entry, many times, with quantum Y each time. 

You enter with one quantum Y on day A in the morning. By late afternoon, you are disappointed to see that the price has moved 5% against you. Happens. You start wishing that you had waited till late afternoon for entry. This can be classified as a random entry error through no fault of yours. Such random “errors” keep happening all the time in the markets. Get used to them.

Because your quantum Y was small, your “error” was also small. That’s the point being made here. 

You are going to enter with quantum Y many times. Sometimes, immediately after entry, price might move in your favour. There might be lesser slippage. You might get a gap-down entry. You might enter after a big correction. Overall, whatever goes in your favour gets written off against all “errors”, such that in the long run, over many entries, the effect of errors is nullified. 

Well you got me there. Nullified, I say. Then you ask what the entry error minimalization talk was all about, when it would get nullified in the first place. 

Which is when I ask that what was it that would lead to nullification?

Many, many entries, right?

What has preserved your capital enough to last for those many, many entries?

A small entry quantum.

Also, psychologically, you know that your small quantum translates into a small potential entry error for you. So, your psyche is all geared up and raring to go. It is not afraid of entry, or of the error you might make upon wrong entry. 

To sum up, at first, a small quantum works in your favour because it causes lesser potential entry error, seen as an amount. 

Then, because your entry quantum is small, your capital lasts for many, many entries, which is when one can start speaking of entry error nullification because of evening out. 

Whichever way you look from, it is the small entry quantum that works for you.

Stocks and the Art of Sitting

When can you sit?

When you’re comfortable.

It’s as simple as that.

When can you remain comfortable over very long periods of time?

When you’ve bought with appropriate margin of safety. That’s when.

Not enough margin of safety at time of purchase means jumping around and tension everytime the market rumbles.

Do you want that?

Are you investing to be on the roller-coaster day in and day out?

If yes, why are you investing in the first place?

Why don’t you just trade?

Be on your roller-coaster and recognize what you are doing.

There’s nothing wrong with being on the roller-coaster.

However, there’s something hugely wrong with being on it and not know that you are on it.

Instead, you have told yourself that you’ve pickled away your doubloons safely for a lifetime.

With inadequate margin of safety at the time of purchase, nothing could be further from the truth.

Why?

Biochemistry.

It changes when there’s tension.

Due to a changed biochemistry, we make mistakes.

We sell at a bottom, or we double-up thinking it’s the bottom, only to sink further, and then we actually go and sell at the bottom.

Bottomline is, we are likely to make vital mistakes if there’s something disturbing us.

Let’s remove the cause of the disturbance, so that we can go on to discover the art of sitting.

While investing, let’s buy with adequate margin of safety.

What are your Millions Worth?

Sure, today they’re worth…

…millions.

Nobody’s taking that away from you.

However, tomorrow is a different story.

What will be the shape of your wealth in the far future?

In what form will it be stored?

Identify that now.

Why?

Because you can start pickling away in that form, little by little, right away.

Moving a chunk in one shot is tricky.

You don’t do it unless you’re absolutely sure.

You don’t bet the farm – on anything – period.

You need to move things quantum by quantum, over decades perhaps.

Final destination needs to tally with your risk-profile.

If it doesn’t, you’ll end up being jumpy and uncomfortable, and you’ll make a mistake.

When it’s about your life-savings, there’s no margin for error.

Why has one taken such a large chunk of time into the equation?

You see, when time is expanded long enough, difficult problems becomes easy to solve, because one ends up actually taking time (read pressure) out of the equation. Time is quasi infinite, so one doesn’t worry about it anymore. One has TIME to think things over and decide at leisure.

Also, over the course of a large chunk of time, you might realize that your risk-profile has changed, and that you are not comfortable with the final destination anymore.

That’s fine.

Change the final destination.

You define the rules, remember.

The bottom-line is that in whatever shape and form your wealth is stored in the end, that shape and form needs to address everything you wish that wealth to do and be.

There’s a lot of thinking that needs to go into this.

Do that thinking now.

It pays to be financially literate.

Nobody really teaches you financial literacy in school or college. Bookish knowledge is not financial literacy. Field knowledge is.

You’ve got two options.

Get financially literate on your own by playing the field, making mistakes, and learning, or…

…find someone who is already financially literate, and learn from him or her, from his or her mistakes.

Whatever you do…

…do it now…

…to ensure that your wealth not only remains intact…

…but also continues to grow.