The Kirk Report once again produces an impressive post entitled “Reading Less, Practicing More & Getting Experience” that reinforces the need to practice actually putting capital at risk to learn trading effectively.
The thrust of the article brings into focus many of the benefits that the Texas Holdem Investing method brings to learning how to trade.
Practicing is an essential part of learning to invest, and this can only be achieved by investing and trading with real capital. And the most important elements that need to be practiced are emotional discipline, risk management, and adhering to trading rules.
However, for the uninitiated, starting to put capital at risk to practice investing straight away if a difficult option to pursue, and is likely to result in capital loss.
Texas Holdem Investing is a solution to this problem. A novice investor who is learning the fundamentals of security and markets analysis, can use poker as a way of practicing emotional control, risk management, and rule adherence with smaller amounts of capital then required for investing and with a greater speed of practice.
Learning and playing poker can also demonstrate the value of another one of the points raised in the Kirk Report article, namely that too much reading / information can be detrimental to trading. A poker player can read about strategy and how to play hands for a long time with little effect on the player’s skill base. In fact, having too much information in a player’s head can obstruct the development of natural intuition which is critical to good play. Similarly, too much analysis can obstruct a trader’s ability to get synchronised with the markets.
To paraphrase (and slightly alter) one of the final quotes from the Kirk Report piece, poker is a learning experience for investing like no other, since you have to put real money at risk in a controlled fashion and you experience the “heavy emotion” of the pain of loss and the thrill of wins – just like in the world of trading and investing.
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“Practicing is an essential part of learning to invest, and this can only be achieved by investing and trading with real capital. And the most important elements that need to be practiced are emotional discipline, risk management, and adhering to trading rules.”
The above paragraph is wrong – almost by definition.
1) You present your argument as fact, when it’s clearly an opinion.
2) I hold very strong opinions, but never try to pass them off as fact. i suggest you consider doing the same.
3) For many – for the emotional, for those who cannot treat practice trading as if it were real – then I agree. The real thing is necessary. However, it’s just those character traits that are going to make the trader unsuccessful
4) Anyone who can hold emotions in check has much to gain by practice trading. And here’s the part you don’t get. Even experienced traders can benefit by paper trading a new strategy or testing a new idea, or modifying an existing trading plan.
5) I agree that a trader wants to adopt rules and be aware of them at all times. The difference between an expert and someone claiming to be an expert is knowing when to break the rules and violate the plan.
Maybe you’ll get there someday if you drop your dogmatic approach.
Regards
Mark,
Thanks for the robust feedback, which is appreciated.
I will endeavour to respond to each of your points in turn.
1) Although the argument may appear to be written as a statement of fact, I must make it clear (as evidenced by the Disclaimer on this site) that all of the content on this site is meant in an advisory context and there are no statements of definitive fact, no matter how the writing appears. There is no holy grail in the investment world. However, I was taking my inspiration from the Kirk Report article which did have the quote “True real life experience is a teacher unlike any other”, which is somewhat categorical itself.
2) My response to your point (1) addresses my thoughts on this issue.
3) I would disagree that “those character traits are going to make the trader unsuccessful”. Unfortunately your statement here could be construed as having a “statement of fact” element, but I realise that this is not your style. Although such traits could make an uninitiated trader unsuccessful, the point of a program such as Texas Holdem Investing is to utilize poker to help “train” people out of such traits, which is possible in many cases.
4) The “anyone” to whom you refer in this point is likely to be a very small number of people, since the ability to hold emotions in check in the context of investing and trading is indeed a rare skill (particularly if not practiced). Certainly all traders can benefit from paper trading to test whether a strategy has an edge. But there is a world of difference between finding a successful paper trading strategy and executing it in the markets in the face of drawdowns and volatility. Although experienced traders use paper trading for such testing, only implementing and practicing the strategy in the real markets indicates whether money can be made using the strategy. Also, paper trading will never fully demonstrate the effects of imperfect execution and slippage on a strategy – once again real trading is needed to determine such effects.
5) Knowing when to break rules is indeed an indication of a high level trader. However, to get to a position where one can break rules, one has to be able to follow rules rigorously, once again in the context of “high emotion”. I think that many more trading accounts are likely to have been reduced through non-adherence to rules rather than incorrectly breaking them.
So in summary response, I do hope that I will get there some day, but I don’t think my approach is dogmatic. I simply believe that poker is an excellent medium and tool for learning and preparing to invest, particularly for people who have no experience of the investment world. And I am not alone in this belief as you can read about on other pages at this blog referencing David Einhorn, Andy Beal, et al.
However, as with all commenters I do appreciate you taking the time to write here and I will certainly bear your feedback in mind in the future.
John (aka The Masked Financier)
What about unintended consequences? What percentage of would-be traders fall into poker addictions, which would cause the spawning of numerous mini-Nick Leeson’s? It would be a vicious cycle, losing money playing poker on nights and weekends (which traders should be using for rest, strategic review and development, and model tweaking), and then taking stupid risk during trading hours to feed the habit?
Caveat Bettor,
This is a fair point to raise in the context of using poker to learn about investing and it is something that I am giving consideration to while working to complete the book.
I would appreciate any thoughts from yourself or other readers on how to minimise the risks of this type of situation arising.
Thanks for the comment,
John (aka The Masked Financier)
My concerns are not just hypothetical; they are practical. I’m a proprietary trader at a bank, and have been working on various arbitrage strategies for more than a decade in New York. I’ve got a buddy at trading shop and we chat frequently about our trades. He’s a big fan of Hold Em’ and hosts games in his home all the time, so I sent him a link to your post, and he told me that his shop has been burned badly by hiring poker players. I won’t be able to give you much more in the way of specifics though; this buddy is also telling me I need to stop blogging because of the risk it poses to my relationship with my employer (even though I comply with all employee policies). He’s a stickler about risk.
Caveat,
Firstly thanks for giving a little more background on yourself. It makes me feel good when my efforts are read and critiqued by industry professionals.
While I appreciate that there are firms in the industry who have suffered from hiring poker players that doesn’t necessarily reflect badly on the theory that poker is a good training ground for investing. Perhaps the problem is more the hiring processes of your colleague’s firm?
Although as a statistician I don’t like to quote single examples, I do think that Susquehanna is a good example of an investment firm – one of the biggest options trading houses – that has used poker both as a hiring tool (they sometimes host poker tournaments to identify potential employees) and an education tool to great effect. And there has been recent coverage of the fact that other firms and recruiters have also started to use poker skills to identify potential traders.
Thanks again for the comments,
John (aka The Masked Financier)