Following on from the encouraging success of my ebook launch I have become re-invigorated about Texas Holdem Investing and its potential. Hence I thought it an appropriate time to draft a new blog post.

And given the upcoming Berkshire Hathaway Annual Shareholders Meeting what better subject than a review of Warren Buffett’s 2010 Letter to Berkshire Hathaway Shareholders through the lense of poker. And, since the Masked Financier also has a few other Buffett / Berkshire investment theses, I thought that this post would be a good way to put them forward also.

Please bear in mind that all of my views are expressed in the context of the greatest admiration for Mr. Buffett, who has a peerless track record, and who has done so much for the education of investors. But, having said that, no-one is perfect…

I have italicised the quotes from the 2010 Letter in the remainder of the post.

Poker Points

There are a number of pieces of the letter that demonstrate poker concepts that can be applied to investing strategy.

Bankroll

At yearend we held $38 billion of cash equivalents that have been earning a pittance throughout 2010.

At Berkshire, we have taken his $1,000 solution a bit further and have pledged that we will hold at least $10 billion of cash, excluding that held at our regulated utility and railroad businesses. Because of that commitment, we customarily keep at least $20 billion on hand so that we can both withstand unprecedented insurance losses (our largest to date having been about $3 billion from Katrina, the insurance industry’s most expensive catastrophe) and quickly seize acquisition or investment opportunities, even during times of financial turmoil.

Berkshire Hathaway operates with more than just an adequate bankroll – it has a fortress balance sheet. Having such an “investing bankroll” means that Berkshire Hathaway can survive severe negative downturns and can also bet big when an opportunity arises where the odds are favourable. That is the type of bankroll that poker players and investors need to target whereas in reality they typically operate with insufficient funding.

Odds – Do not Bet when the Returns do not Match the Odds

The willingness to walk away if the appropriate premium can’t be obtained.

When you have evaluated a poker hand situation, if the pot and implied odds show that the money you have to risk to stay in the game is too high relative to the potential rewards then you should set down your cards.

Similarly, if you have analysed an investment opportunity and the returns do not compensate for the potential downside then you should not participate.

Game Rules Do Not Change

Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.

This quote from Mr. Buffett is an optimistic version of an oft-quoted theme in investing i.e. “this time it’s different, but it never is.”

The oft-quoted theme is generally a warning against getting caught up in the positive mania surrounding a bubble when it is inevitable that gravity will eventually take hold. Mr. Buffett in this case is arguing that when the market is crashed out it is inevitable that unless society is collapsing that valuations will swing upwards.

Texas Holdem Poker teaches this theme well, since it is a game where the rules never change nor does the method for ongoing success. Texas Holdem teaches the value of sticking with a core set of principals even in the face of evidence that they are not working over a period of time.  Just like Mr. Buffett sticks to his methods no matter what the mood or (lack of) logic of the market.

Public Relations Points

This section sets out some points about Mr. Buffett’s PR capabilities, which are legendary.  Having said that even his skills in this area have not managed to avert continued public scrutiny about David Sokol’s recent Lubrizol share trades.

Table Image

In many cases, these are people who have sought out Berkshire as an acquirer for a business that they and their families have long owned. They came to us with an owner’s mindset, and we provide an environment that encourages them to retain it.

There is no doubt that Mr. Buffett’s “folksy” image has enabled Berkshire Hathaway to get proprietary dealflow and hence acquire businesses which were not available to the ordinary corporate or private equity acquiror.  Despite this image Mr. Buffett has often demonstrated ruthless streaks with Berkshire Hathaway when it comes to depriving businesses of capital that are not sufficiently successful in his view.

Therefore, his table image in the investment world has allowed him to access unique opportunities with risk-reward profiles that are often better than would be otherwise available.  Furthermore, this table image is likely to have enabled him to pay lower prices for such investment opportunities, since his reputation as an attractive buyer has helped Berkshire to avoid auction situations which would otherwise drive up acquisition costs.

Borrowing

Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float we hold remains remarkably stable in relation to premium volume. Consequently, as our business grows, so does our float.

This aspect of Berkshire Hathaway and how it is portrayed continues to astound the Masked Financier and once again is testament to Mr. Buffett’s “table image” in the investment world.  The above description of this aspect of Berkshire’s business model shows that it is effectively one of the biggest leveraged buyout firms in the world, yet Mr. Buffett often criticizes the private equity industry for the use of leveraged buyouts.  And even more amazing is the comparative sources of borrowing for Berkshire and the rest of the corporate world’s acquirors.  Other firms borrow money from banks, who are set up to make risky loans (sometimes not so well) for the purpose of acquiring companies.   Yet Berkshire borrows money from insurance policyholders, who themselves expect that their insurance premiums are being invested in cash and bonds.  If the balance sheet of the Zurich or Progressive insurance companies were analysed and showed large long term put option derivatives and other such esoteric securities the investment community, the press, and likely the financial regulators would be aghast, but when Berkshire Hathaway does it barely an eyebrow is raised.

Time Horizon – Forever

The largest earner in our manufacturing, service and retailing sector is Marmon, a collection of 130 businesses. We will soon increase our ownership in this company to 80% by carrying out our scheduled purchase of 17% of its stock from the Pritzker family. The cost will be about $1.5 billion. We will then purchase the remaining Pritzker holdings in 2013 or 2014, whichever date is selected by the family. Frank Ptak runs Marmon wonderfully, and we look forward to 100% ownership.

Warren Buffett often represents that one of the benefits of the Berkshire Hathaway worldview is that the investment horizon is forever and that investors can benefit from this approach compared with the more short term buy-and-flip perspectives of private equity investors and the constant portfolio churn of corporate acquirors.  As per above Mr. Buffett’s publicising of this approach has also helped in getting access to proprietary deals not available to the rest of the market.

However, the Masked Financier thinks that Mr. Buffett is being a little disingenuous when he states that Berkshire Hathway’s holding period is forever when its CEO is 80.  Who knows what will happen to Berkshire Hathaway when Mr. Buffett moves on?  Particularly since the investment bankers of Wall Street seem to have started to get involved in Berkshire Hathaway’s investment process based on Citi’s advice to David Sokol which let to the Lubrizol acquisition.  It is ironic that the reason for Berkshire’s takeover of the Marmon-Pritzker companies, which themselves had been in existence since 1953, was because of a family feud which I’m sure the founders could never have foreseen.

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I hope readers find this update on the Masked Financier’s thinking about Warren Buffett and would appreciate any comments or feedback.  I look forward with interest to hearing Mr. Buffett’s thoughts at the Shareholder Meeting.

Still trying to get back into the groove with the site.

I’ve finally “spun out” of my full time job and am setting up my very own mini investment bank – prop trading included.

Managing to get some tweeting done but still short on the article inspiration.

However, I have made some changes to the site and made one exciting move as follows:

• Free ebook – Readers can now download a free copy of my ebook – “Texas Holdem Investing – An Introduction” (E-Junkie, the site I use to host my download, only permits 100 free downloads per day!  And amazingly that limit is being hit nearly every day.  So, if you aren’t permitted to download from the link above, please sign up to the TexasHoldemInvesting.com email list and you will received download instructions or send me an email at maskedfinancier@texasholdeminvesting.com with “Free Ebook Request” in the subject line).  Please take your own copy, tell everyone about it, and feel free to email the book around.  I only ask that you don’t copy the materials without giving The Masked Financier credit and linking to this site.
• StockTwits – I’ve added the StockTwits newsfeed to the homepage
• Twitter – I’ve added the MaskdFinancier’s Twitter feed to the homepage

Enjoy the next phase of the Texas Holdem Investing website!

UPDATE: Thank you so much to all the people who have downloaded my introduction ebook.  I am very grateful that so many people (in the hundreds!), a number of whom are financial professionals, have taken the time to explore the Texas Holdem Investing concept.  I would appreciate any comments and feedback that readers may have.

The Masked Financier has been out of the game for some time owing to many interesting things going on in the “work” sphere.  I have finally managed to negotiate an amicable exit from my long-term employer and am in the process of setting up a new venture in the financial services space.  Hence the hiatus in my postings here.

However, some interesting commentary on the relevance of card games (blackjack and poker) to investing and mergers and acquisition strategy appeared recently in the financial press which gave me cause to put finger to keyboard again.  In addition, having received some positive feedback on my ebook from some respected online financial authorities I would like to start a buildup to its launch in the near future.

Bill Gross, PIMCO, Investing, and Blackjack

Firstly, the FTfm supplement published an interview with Bill Gross, of PIMCO fame whereby Gross revealed his investing lessons learnt from playing blackjack (subscription may be required).  Gross has become one of the most respected bond fund managers in the world and he currently manages over $1 trillion in his famed Total Return Bond Fund.  Gross publishes regular letters describing his investing thesis and they are well worth a perusal.

Gross describes how his blackjack career in Las Vegas (where else) provided him with many of the concepts and tools necessary to become a good investor, the first concept being that a combination of hard work and mathematical analysis can help an investor outperform.

Gross maintained that playing blackjack developed his risk management skills which was a unique skill in the 1970s relative to many other investors because quantitative risk modelling had not yet become commonplace.
Blackjack taught Gross the folly of betting too often or at stake levels that were too large.

Notwithstanding the lessons about the benefits of a mathematical approach to investing, Gross did also discover the limitations of over-dependence on modelling and leverage to increase returns.  He realised that even when odds appeared to be in his favour over extension could result in large losses.

The drawback of reliance modelling became apparent to Gross when he realised that economics and investments involved people, which created inherent instability that could not be modelled completely.  Therefore, Gross appreciates the need for models to assist in understanding investment decisions but ultimately relies on his own experience to make final decisions.

Ironically, although blackjack can be good at helping investors to learn all of the above concepts, poker is better.  Blackjack teaches discipline and strategic thinking, but poker teaches it at a much higher and complex level with far more possible scenarios.  But most importantly, in blackjack the only real emotional enemy is yourself, whereas in poker you much contend with the emotions of your competitors also – invaluable training for being able to deal with that emotional beast which is the market.

Kevin Fong, 3Par, Merger & Acquisition Tactics, and Poker

PEHub reports how Kevin Fong, the chairman of 3Par, thinks that M&A negotiations are very similar to poker.  Clearly Fong knows what he is talking about in this respect since he has just become a very wealthy individual after HP acquired 3Par in a bidding war with Dell which had all the hallmarks of a high stakes poker “heads-up”.

Fong notes that in M&A negotiations one is trying to maximise one’s own benefit and at the same time attempting to read other players and discern their strategies and whether they are bluffing.

Fong commented that poker is all about knowing your limits and then folding when you reach them.  HP apparently had set a limit which they had not reached when they won the bid, and Fong states that HP played a mean game of poker throughout.

As always, for the creator of the Texas Holdem Investing concept and methodology, it is inspiring to see two people at the top of their games talk about the benefits of gambling and poker in terms of teaching fundamental investing concepts.

The ebook will be out soon so stay tuned.

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” – Warren Buffett

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I have followed with great interest some of the material that has been floating around the news feeds and blogosphere in recent times about who should and should not (and who can and cannot) invest or have valid economic and investment viewpoints.

The first of the articles has been written by the James Montier of GMO, who has a formidable reputation as an investment practitioner who often writes expertly on the areas of value investing and investor psychology.

Mr. Montier’s article – “Barbie Does Economics” – takes issue with a paper by Kartik Athreya of the Federal Reserve entitled “Economics is Hard. Don’t let Bloggers tell you otherwise”. Athreya claims that if one doesn’t have a PhD then one (a) shouldn’t be taken seriously in any economic debate, and (b) doesn’t have the ability to make a meaningful contribution to economics or any discussion of economics. Needless to say Mr. Montier counters Athreya’s proposal quite effectively, starting of with the simple question regarding how many PhD-equipped economists predicted the recent economic crisis (please do read the rest of the article).

The second of the articles was posted by Mark Cuban on his BlogMaverick site and is entitled “The Stock Market is still for Suckers and why you should put your money in the bank”. In it Mr. Cuban claims that the “average investor” who toils away for a short period of time per week doesn’t have much chance of competing against the professional investors who watch the markets 24-7.

Since Mr. Montier hasn’t fixed his baleful stare on Mr. Cuban I will endeavour to provide an opposing viewpoint. I must preface all my comments by stating that Mr. Cuban is a very successful entrepreneur and investor. In addition, as the promoter of Texas Holdem Investing I’m a fan of Mr. Cuban since in the past he proposed setting up a hedge fund that would make money by “gambling” based in part on the similarities between the two fields. But that does not give Mr. Cuban the right to tell all the “average investors” that they are not equipped to deploy their own money in the stock market.

And now onto my own perspective, which hopefully you find valid even though I do not possess a PhD (I am a “professional” investor with some background in stocks, although some people would say this is grounds for dismissing my opinion). Firstly, it is certain the Mr. Cuban has great skill in identifying suckers since he sold his company Broadcast.com to Yahoo in 1999 for $5.9 billion (of Yahoo stock admittedly) on the basis of 1999Q2 revenues of $13.5 million (Yahoo’s market cap now is approx. $18.6 billion). But given the rest of his investing history (often in private investments) it is difficult to ascertain Mr. Cuban’s qualifications to advise on stock market investing, compared to say Warren Buffett (who Mr. Cuban’s quotes and who I quote in this article, but for different reasons). It is also tricky to analyse Mr. Cuban’s perspective as to why it is currently a bad time to invest in stocks since the main parts of the article are both anecdotal and theoretical and does not refer to any data or periods of stock markets history. When making such a proposal as Mr. Cuban does in the piece, I would prefer to see analysis along the lines of the work in Vitaliy Katsenelson’s book on Active Value Investing about long term stock market trends (you can see a PDF of the introduction here). This type of research has been quoted extensively by some major hedge fund managers recently such as Whitney Tilson of T2. And at the end of Mr. Cuban’s article, despite stating that the stock market is for suckers, he proposes that you should only forgo investing your “new money” into the market. But if the stock market is for suckers should an “average investor” have any money in the market?

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And so now onto my own addition to this discussion, which is the concept that all people should have the ability to learn the fundamentals of investing and then be able to apply this information to manage their own money to some extent. And no person or institution has the right to tell people what limitations they have in terms of investing ability. As an aside the genesis of this blog post is one of the first sections of the free ebook – “Texas Holdem Investing – An Introduction” – which will be released soon. (*)

The investment education literature available often seems to fall into two categories in terms of its view on peoples’ investing ability and therefore the best way to provide investment training.

1. Most people do not have the required ability to invest in a way that can “beat the market”. Therefore, people should practise an “allegedly simple” form of investing which is selecting asset classes and allocating capital to so-called index funds for the relevant asset classes which will replicate market returns.
2. Most people do have the required ability to invest and achieve better returns in the market. Therefore, people should learn how to “pick stocks (or whatever other type of asset)” to beat the market.

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It is both wrong and arrogant to state that no-one should invest (or “only the professionals”) because it is impossible to “beat the market”. Equally, it is both wrong, and dangerous to state that most people can definitely develop to a high level the required skills to achieve better returns than the market.

The commentators who make statements about what type of investing is suitable for “people” may be speaking to the benefit of their own agendas, and surprisingly so in some cases.

• John Bogle denounces stock selection and then recommends that you invest in Vanguard index funds (which involves asset allocation “selection” decisions).
• Warren Buffett preaches the gospel of fundamental value based investing and himself concentrates his investments in a small number of assets and then says that most people should invest in diversified index funds.
• William Bernstein talks about the benefits of asset allocation and then mentions that value investing as developed by Benjamin Graham does work.

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Everyone is likely to have some sort of capability to invest their financial capital well given the correct education and training. Charlie Munger once described the requirements well in a commencement speech to the USC Business School in 1994.

To demonstrate this point, and answer the question “who can invest”, it is interesting to analyse the diverse backgrounds of some of the great investors. There is no cookie-cutter template in terms of background, education, or career that these

• Ken Griffin (Citadel) is the Michael Dell of the hedge fund world having started out trading convertible bonds in his Harvard dorm room.
• Steve Cohen (SAC Capital) studied economics at Wharton but apparently learned many of the key concepts of risk taking with money while playing poker in between lectures.
• Jim Simons (Renaissance Technologies) was a mathematics professor at Stony Brook University.
• Bill Gross (PIMCO) initially joined the Navy and then played blackjack professionally before moving into fixed income management.
• David Einhorn (Greenlight) majored in government studies in college, and then spent two miserable years in investment banking before founding his hedge fund with less than $1 million.

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The “professionals” in the investment world certainly don’t have a monopoly on being right and providing (advice on how to achieve) better investment returns than either “the market” or “the average investor”. Numerous pieces of research have shown that the “average professional”, often represented by mutual fund managers, produces investment returns below market index return levels.

But what about “above average professionals”? Even they suffer from restrictions and issues that come with the task of managing large sums of money. Joel Greenblatt (no investing slouch himself) does an excellent job of demonstrating this point in the introduction to his book “You Can Be A Stock Market Genius” where he describes how difficult it is to invest a large sum e.g. $2.5 billion, in a focused portfolio of liquid stocks, amongst other problems.

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Competent investing of your own funds can be an excellent way of increasing your net worth. Although investing well cannot guarantee untold riches you shouldn’t deny yourself the chance to learn effective investing because of the conventional wisdom of the fund industry and other experts which states that asset managers, Wall Street and The City (or the “professionals”) know what is best for your money. It is clear that they don’t given the excesses of the financial services industry collapse that started in mid-2007.

Most people can and should try to learn the main elements required to make good investment decisions regardless of the choice of investment vehicle.

* Please sign up to my mailing list (top right of the page) if you would like to receive details about how to obtain a copy of the ebook.

To my band of dedicated readers:
Firstly, thanks for spending some of your valuable time reading the material at TexasHoldemInvesting.com.
I’ve gone through a hiatus in posting and tweeting recently.
The main reason for this was that I have exited my full time job to start my own financial advisory and investment business. It has taken some time to manage the exit and thankfully it all went well and amicably. It has really shown me the importance of maintaining good relationships with former colleagues.
And since I will be escaping somewhat from the punishing timelines of the global capital markets I have had more time to focus on thinking about Texas Holdem Investing.
The result is that I hope to release my free introductory ebook over the next few weeks.
Please sign up to my mailing list if you would like a copy sent out.
I intend to send advance copies to a number of financial writers on the internet who have made past references to the connection between poker and investing.
If you would like to be on this advance list please sign up to my list or email me directly.
I’m looking forward to making my first small contribution to the investment education literature and would welcome any suggestions from my readers.

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.

Garry Kasparov, the legendary chess champion has written a fascinating article entitled “The Chess Master and the Computer” in the New York Review of Books. The main subject of the article is a precis of a book entitled “Chess Metaphors: Artificial Intelligence and the Human Mind” which is written by Diego Rasskin-Gutman.

However, despite the subject of much of the article being chess Kasparov makes some remarkable comments with relevance to the Texas Holdem Investing concept and how perhaps poker may now be the best game for teaching risk.

The core subject of “The Chess Master and the Computer” is how the advent of chess supercomputers has changed the face of the chess world, and in many unpredictable ways.

Game (and Investment) Outcome Space

Early in the article Kasparov refers to the interesting analogies that are used to explain the vast range of potential moves in a game of chess. One of the more powerful metaphors used is that when a chess player attempts to look out 8 moves there are as many possible games as there are stars in the galaxy!

At the end of the article Kasparov then talks about how poker has all of the complexity of chess, with the added layer of incomplete information (chess players can see all of the pieces), which may mean it is a better medium for teaching about making decisions in uncertain environments. Clearly the investment world to be one of the ultimate uncertain environments, thus making poker an ideal tool for learning the core concepts of investing.

Education of Chess Players (and Poker Players and Investors)

One of the unintended consequences of chess supercomputers is that younger players who are familiar with computers can now play and learn against “professional” chess supercomputers from the comfort of their home. The ability to learn at such levels has created a new breed of chess masters, often from unlikely countries such as Norway.

The relevant point here for Texas Holdem Investing is how the internet allows poker players and investors to train at their craft from anywhere in the world – you don’t need to be based in New York or Chicago (for investing) or Las Vegas (for Texas Holdem).

Kasparov also notes that playing chess on computers where there is access to information on the right types of moves and strategies has helped players accelerate and compress the learning process for chess. Kasparov refers to the well-known “10,000 hours to expertise” cited by Malcolm Gladwell, and seems to imply that computerised chess learning has compressed the amount of time it takes to reach the 10,000 hour mark.

This idea is an integral part of the Texas Holdem Investing concept and program. Learning by computer does not reduce the 10,000 hours, it just makes it a lot easier to get there in the shortest possible space of time. Essentially, one can play more scenarios in a shorter space of time, and can access a vast computerised database (the Internet!) of information on strategy improvement.

This theory of fast-forward learning that can be achieved for investors in terms of the key skills of risk management, investing discipline, and emotional control is one of the unique benefits of Texas Holdem Investing (for a longer discussion see “Texas Hold’em Poker – The Fast Forward Button for Investment Training”).

Poker is better than chess for teaching risk in current times

Kasparov finishes off the article with an incredible observation by a former world chess champion who clearly still retains a passion for the game of chess.

Kasparov proposes that chess may be the wrong game for our current times and that poker may be more appropriate. He notes that poker is a game of imperfect information and variable stakes which means that players can learn to appreciate the effects of risk management, chance, and bluffing. As Texas Holdem Investing notes, these are three critical elements in the sphere of investing (bluffing is not always an obvious aspect investing, but try telling that to someone who loaded up on Enron stock based on the reports from management).

The chess master notes that poker outcomes are significantly dependent on human psychology, which indeed is a critical aspect of navigating the investment world. Kasparov feels that perhaps poker can help individuals learn how to take risks and so the mass take-up of the card game is not a bad thing.

According to Kasparov learning poker can teach people that there are no rewards with out corresponding risk. This is one of the most vital lessons that must be learned before putting your money at risk in the investment world. Texas Holdem Investing shows how to systematically approach learning poker so that you can embed this lesson into your mental circuitry before swimming with the investing sharks.

There have been a number of articles about poker and investing since the start of 2010 which is always great reinforcement for the Texas Holdem Investing concept.

Kiplinger recently posted three articles about poker and investing which I felt were very comprehensive on the subject.  This post reviews the Kiplinger articles through the lense of the Texas Holdem Investing concept.

I will also expand on a couple of sections of the Kiplinger articles which discuss the merits of using “free” poker to learn to invest and how this is at odds with a core part of the Texas Holdem Investing thesis: learning to invest by playing poker with real money at risk.

“How Deepak Chopra Helped Me Play Poker Better”

Bob Frick describes how in 2005 he made the connection between poker and investing with a biofeedback tool promoted by Deepak Chopra.

In an effort to improve his Texas Holdem play Bob hooked himself up to the “Journey to Wild Divine” biofeedback that measures stress and discovered that when playing Texas Holdem poker his stress levels became elevated.  He then performed the same test when he was making financial decisions and found that the same stress elevation occurred.

This outcome is an interesting proof of the theme from Texas Holdem Investing that poker can be used to train your psyche to deal with the stress of making financial investment decisions where your money and capital is at risk of loss.

While an excellent article early in the piece Bob discusses how he learned to play Texas Holdem Poker through playing “free” games on America Online.  Apart from learning the basic rules, Texas Holdem Investing strongly advises against using free games to learn poker and to discover your emotions.  When no money is at risk you simply will not react the same was as when money could be lost, even if the amounts that could be lost are small.  After learning the rules you must start playing for real cash – even if it is at the 1c/2c limits.  Like any training regime you need to start off small, but playing free poker is like paper trading – of limited usefulness as an education tool for real investing.

“How Texas Hold’em Simulates Investing”

This article describes why Texas Holdem is the closest form of gambling games to investing because players with greater skill levels will generally “outperform the market” compared to less skilled players.  Frank Murtha states that the goal of Texas Holdem is “to accumulate capital based on decisions with imperfect information” – the part in quotes is an exact description of investing.

The article describes how the various phases of Texas Holdem are analogous to the phases of an investment decision.

• Evaluating starting hands is similar to reviewing the investment opportunities available to you.  The small and big blinds are an analogy for your costs of an information and investing platform.
• Making a bet is similar to making an actual investment
• Then the (investment) flop occurs and you must review the investment based on new information, which is still incomplete because you don’t know what your opponents hold.
• If you are still in an investment at the turn and river stage then it should be a very good security because you are likely to have committed a lot of capital

At each stage of Texas Holdem poker you must make the decision to put more capital at risk (or leave the same capital at risk) or to cut the investment based on new information.  Playing Texas Holdem can help you develop your own evaluation framework for your investment decisions.

The article closes with a statement that it is not necessary to play poker with real money to identify your psychological makeup that may affect your investing.  The article mentions various investment psychology experiments that did not use real rewards, but I would question the full value of such experiments in terms of simulating the real world.  However, as stated previously playing “free” poker to learn to invest is like “paper trading”.  It misses out a huge element of real like investing (and poker) – the fear of losing money and the elation of achieving gains, and how these raw emotions can affect your performance.

“How Poker Can Make You A Better Investor”

This piece focuses on a number of important issues that make poker an excellent tool for learning to invest and trade, with a focus on how poker teaches the emotional side of investing.

The article notes that a number of market practitioners such as Andrew Lo of MIT, Aaron Brown formerly of Prudential Securities, and Frank Murtha of MarketPsych state that poker can help investors develop the emotional stability necessary for investing.  This is a fundamental part of the theory of Texas Holdem Investing where Step 4 explains about managing emotions through the following steps:

• Understanding your emotions – when you play Texas Holdem with real money you will learn about how your emotions react to winning and losing and having to make decisions where real money is at risk
• Gradual emotional training – Texas Holdem allows you to start at low risk levels to gradually increase the intensity of your emotional training.  Investing generally has to start at much higher capital levels, where investors typically have no emotional frame of references, particularly for losses.
• Removing your emotions – Texas Holdem helps teach the development of rules-based systems that remove emotion from investing, and also the discipline of stopping activity in the face of a sequence of losses to take time to prevent your emotions from causing problems.

The first section of the article discusses about how poker can permit a learning investor through many financial decisions in a short space of time and so accelerate the learning curve while putting limited amounts (or no) money at risk.

Although playing a few hours, or an evening of poker can certainly help an investor learn more about their emotional make up I think that this is insufficient as a method of learning about your investing through poker.

The Texas Holdem Investing thesis is that poker should be played on an ongoing and rigorous basis with real money at risk for a long period before a new investor puts any investment capital at risk.  Further to this concept, a learning investor should be able to consistently win at poker for a reasonable period of time before committing capital to the investment markets.  Unfortunately not everyone is suited to the investing world and may be better off applying their skills elsewhere in the world of finance.  Following the Texas Holdem Investing concept can help a person to find out their suitability for investing without losing huge amounts of investment capital over a long period.

One of the advantages of playing a large number of poker hands is that it demonstrates how long it can take to get from a small starting capital amount to increase it.  A real life example carried out by one of the most well known poker professionals – Chris Ferguson – was where he tried to build up to a $10,000 bankroll starting off from zero.  The results of the experiment are described here, in addition to some rules that Ferguson developed for poker which are equally applicable to investing.  By building up your own poker bankroll to $5,000 or $10,000 you will learn the time and effort it takes to make money in the investing markets.

Play Real Poker To Learn Investing

Playing poker casually and for free, like “paper trading”, can help shed some light on your investing capabilities and emotional composition.  However, it is only by playing it with rigour and over a long period of time that it can help to teach and improve your skills at investing with real capital at risk.

As part of the year-end activities at TexasHoldemInvesting.com this post contains the top blog articles and online book pages from this 2009.

Top 10 Blog Posts

1. Beating the Odds with (Texas Holdem) Poker Investing – Jeff Yass and Susquehanna
2. The World Series of Poker (WSOP) Investment Banker – Steven Begleiter
3. David Einhorn – Hedge Fund Titan then Poker Champion – Texas Holdem Investing in Reverse
4. The Poker Banker – Andy Beal – and Sitting Out the Longest Streak of Bad Starting Cards – Like Texas Holdem Investing
5. Dr. Bob Rotella, Golf, (Sport) and (Texas Holdem) Investing – Part 1 (of 2)
6. How is Texas Hold’em Poker Similar to Investing? Part 1
7. Warren Buffett Holds When He Should Fold (ConocoPhillips)
8. University installs virtual trading floor – it should install a real poker room too
9. Nassim Taleb’s 10 Rules to Black Swan Proof the World – My Rule 11? – Use Texas Holdem Poker to Learn to Invest
10. Volokh – Is poker (and investing?) a game of skill

Top 5 Book Pages

1. Table of Contents
2. Fundamental Plan Elements
3. Step 1. Texas Holdem Vs Investing
4. Step 10. Bankroll / Money Management
5. Introduction

All good investment practitioners should review performance at the end of each year compared to expectations at the start of the year and set goals for the next year.  My expectations for 2009 were low since I hadn’t even started despite 2 years of thinking about it, so that is the benchmark.  So here goes for Texas Holdem Investing:

2009 Milestones

• Set up the TexasHoldemInvesting.com website in April 2009 on the WordPress platform *
• Published 54 blog posts
• Completed the introductory version of the Texas Holdem Investing ebook
• Posted as far as Step 12 of the introductory Texas Holdem Investing program on the website
• Set up the MaskdFinancier Twitter account and signed up to StockTwits
• Set up the TexasHoldemInvesting.com mailing list with MailChimp software **
• Received almost 2,600 visits in Q4 2009 with 6,150 pageviews
• Wrote guest posts for MarketFolly and WallStCheatSheet
• Received recommendations from a number of sites including Abnormal Returns

2010 Objectives

• Continue to produce blog posts with greater frequency
• Complete posting the introductory Texas Holdem Investing book on the website
• Produce an ebook report on poker and hedge fund managers based on previous content on the website
• Finalise the ebook version of the introductory Texas Holdem Investing book and distribute it for free as widely as possible
• Produce the advanced Texas Holdem Investing book and make it available for sale on the website
• Explore the issues around setting up a new blog under the Masked Financier brand based on my private equity industry experience

If there are any other objectives that readers think I should add to the list please let me know.

* The experience with WordPress was tremendous and I can thoroughly recommend WordPress to anyone who is setting up a website.  Although it is known as a blogging platform, WordPress is in fact an excellent general website management solution.

** Mailchimp is another excellent piece of software so far, and is free for the first 500 subscribers – again I would recommend it.