Todd Harrison of Minyanville recently posted up his 10 Commandments of Trading on the MarketWatch website. Todd once worked with the famous (or infamous depending on how you think) Jim Cramer managing the Cramer Berkowitz hedge fund. It’s an interesting list with associated analysis by Todd and you can view it at “The 10 Trading Commandments – The Basic Rules for Investing Success”.
It’s always fascinating to compare such investing or trading rules sets with what is required to play poker successfully and thus show the effectiveness of using the Texas Holdem Investing method to learn about investing (and trading which is a subset of investing).
I’ve reproduced Todd Harrison’s 10 commandments below:
1.) Respect the price action but never defer to it.
2.) Discipline trumps conviction.
3.) Opportunities are made up easier than losses.
4.) Emotion is the enemy when trading.
5.) Zig when others zag.
6.) Adapt your style to the market.
7.) Maximize your reward relative to your risk.
8.) Perception is reality in the marketplace.
9.) When unsure, trade “in between.”
10.) Don’t let your bad trades turn into investments.
And now I reproduce the 10 commandments again and in each case discussed the relevance of each one to Texas Holdem Investing. Not all of them are directly related, but you will see a strong thread of correlation.
1.) Respect the price action but never defer to it.
Looking at the cards in your hand and on the table is not enough in Texas Holdem Poker. Our eyes without our brain can deceive us. You need to analyse the probabilities of the situation and the likely holdings and behaviour of your opponents too. AA is not always a winning hand even with an Ace on the flop if someone else has a flush draw. Similarly, stocks going up (like internet stocks in 1999 or bank stocks in 2006) are not always good stocks and vice versa – stocks going down are not always bad (in fact Warren Buffett usually regards it as a good thing as discussed at Get Rich Slowly!).
2.) Discipline trumps conviction.
Discipline is a vital element of playing Texas Holdem Poker, and by following Texas Holdem Investing you will acquire discipline that will aid your investing. Conviction is the enemy when putting money at risk (in any market or game) because it can overcome your discipline and make you deviate from your specified risk levels and investment strategy.
3.) Opportunities are made up easier than losses.
I agree with this commandment in one sense because it is important to be able to decide not to trade when things are not going your way. You do not need to trade or play poker every day.
However, it is important to realise that if you are good at minimising your losses, then sometimes good opportunities that are missed cannot be made up that easily. Folding out of potentially large winning opportunities, both with investing and poker, can have a very negative effect on your total returns. Some of these opportunities
4.) Emotion is the enemy when trading.
This is a big one. Emotion is a close relative of Conviction. And, like Conviction, Emotion can override your Discipline too, with terrible effects. Both in poker and investing.
5.) Zig when others zag.
In poker when your opponents are emotional you should be unemotional. When your opponents are going on tilt in response to bad hands, you should be folding like a beach chair.
Learning this skill through Texas Holdem Investing will help you to be a contrarian investor so that you can “be fearful when others are greedy” (another Warren Buffett quote, but to be fair, the man has form when it comes to gambling – more about that in a future post!)
6.) Adapt your style to the market.
As discussed in the Texas Holdem Investing book you’ll see that different styles of play are required for Limit, Pot-Limit, No-Limit, Tournament, and Sit & Go games. Similarly, in investing there are different skills required for trading small cap stocks, large cap stocks, options, and futures. You need to ensure that your style and skill set is appropriate to the game / market you are playing in.
7.) Maximize your reward relative to your risk.
Texas Holdem Investing will teach you to calculate the risk/reward parameters for each hand situation using Pot Odds and Implied Odds. You can use these parameters to wait until you are faced with the most profitable hand situations and then you can strike. For investing you need to work out the appropriate risk/reward parameters for each situation.
8.) Perception is reality in the marketplace.
Creating a table image in poker is hugely important in order to influence how your opponents view you. Investing is not identical in the sense that there are some markets that are very large and liquid e.g. forex, where your image in the market is not relevant. However, in smaller markets where participants know each other it does get very similar to a poker game. However, even in the large and liquid markets your perception of yourself can be important!
9.) When unsure, trade “in between.”
If you aren’t sure about a particular poker hand and how it is progressing, or if an investment is moving in a way you don’t understand, then you need to get out and stay out until you can find your bearings again. Texas Holdem Investing will train you to acquire this skill by being able to control your emotions more effectively.
10.) Don’t let your bad trades turn into investments.
Trying to explain why your investment or poker hand is going wrong is futile. If you play a starting hand because of a certain expected outcome, and the outcome starts to look like it won’t happen, then you need to fold out of the hand. The same goes for trades that don’t move as per your investment thesis. Good poker players and investors can make money. Great poker players and investors can take losses. Texas Holdem Investing will help you to learn to take losses.
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